Editor's Note: Shah spotted this crisis unfolding. It affects your money, so he wanted to let you know about it immediately. Here's Shah...
Do you remember the financial crisis of 2008?
The one caused by a meltdown in mortgages... trillions of dollars of which were owned and "guaranteed" by government-sponsored enterprises Fannie Mae and Freddie Mac?
Do you remember that Fannie and Freddie had to be bailed out by the government - I mean taxpayers - so their total implosion wouldn't trigger a global depression?
Well, the man behind their bailout, former Treasury Secretary Henry Paulson, remembers, and vividly.
He's now going public with his recollections because Congress is blocking theirs out... reaping the profits... and setting the table for a repeat performance... Full Story...
Editor's Note: Shah spotted this crisis unfolding. It affects your money, so he wanted to let you know about it immediately. Here's Shah...
The U.S. Justice Department slapped Standard & Poor's Rating Services with a lawsuit claiming the agency sidestepped its own standards when rating mortgage bonds that collapsed during the financial crisis, resulting in billions of dollars in losses for investors.
U.S. Attorney General Eric Holder's civil charges, filed late Monday against S&P, are the first federal enforcement charges against a credit rating firm over the financial crisis.
Reports say the government is going after S&P to the tune of more than $1 billion.
Following a report in The Wall Street Journal Monday afternoon that the government planned to file the suit, S&P acknowledged it was expecting the action and claimed the firm was being wrongly punished by the U.S. government for "failing to predict" the housing meltdown or financial crisis.
New York-based S&P, one of the three major rating firms, has denied any wrongdoing. The firm said in a statement before the government filed the suit that it would be "entirely without factual or legal merit."
Young Americans are falling deeper and deeper into a financial crisis that will be nearly impossible to escape from in their lifetimes.
Unfortunately, the problems start at a very young age. Not only do a record number of school-age children live in poverty, but the number of homeless children in the public school system has reached an all-time high.
Even young adults who are able to attend college have trouble supporting themselves after graduation. Students take on mountains of debt to pay for school, but all too many of them can't find a decent job that covers their bills and their loans.
And those who do find jobs will likely be working for many more years than previous generations. That's because Social Security is expected to run out well before today's youngest workers retire. Those who have failed to save enough will end up working into their 60s, 70s and 80s.
"We don't know how the story ends, but we know how the story is beginning," Paul Taylor, executive vice president of the Pew Research Center, told CNN. "At the beginning, today's young people are not doing better than yesterday's young adults."
Here are 14 startling statistics painting a bleak financial picture for many young Americans.
The problem is it's just not true. Companies that carry little or no debt are kicking butt and will continue to do so even if the markets stumble.
Not only are most of them tacking on solid numbers in very volatile markets, but over time these debt-free companies are proving themselves to be stable and reliable performers.
Take last year for example. The S&P 500 returned 2%. Yet, the top 15 firms as measured by the highest amount of cash and short-term investments as a percentage of total assets returned an average of 15% according to CNBC analyst Giovanny Moreano.
That's 650% more than their debt-laden brethren over the same time frame.
So far this year, my favorite debt-free companies have tacked on average gains of 19.82% versus the S&P 500, which was up 9% as of July 3. That's a 120% advantage over the same time period.
Going further back these same companies have done even better.
In fact, my favorite debt-free choices have returned an average of 349.16% versus a loss of -3% for the S&P 500 as a whole since the top of 2007 when the financial crisis broke.
Over the past decade that number jumps to over 2,061%. And, I'll bet you dimes to Bernanke dollars that these same debt-free companies will pull ahead further in the years to come.
Barclays (NYSE ADR: BCS) last week was slapped with a $456 million fine for rigging Libor rates, the rates banks charge each other for loans.
The record fine was levied to settle an investigation into attempted manipulation and false reporting related to two benchmark interest rates. Those rates help determine terms of loans and financial contracts around the world that form the basis for hundreds of trillions of dollars' worth of transactions.
The news has been a major blow to Barclays' once stellar reputation, and now led to the fall of Chief Executive Officer Bob Diamond.
Barclays CEO Diamond ResignsDiamond resigned Tuesday, a day after Chairman Marcus Agius stepped down amid the scandal.
"The external pressure placed on Barclays has reached a level that risks damaging the franchise - I cannot let that happen," Diamond said in a statement Tuesday.
Agius took the blame Monday, acting as the fall guy. He said in a statement, the "buck stops with me, and I must acknowledge responsibility by standing aside."
Then a pressured Diamond announced he would leave, and Britain's politicians and regulators labeled this the first step towards "a new culture of British banking."
Scores of shareholders lobbied for Diamond to take responsibility.
John Mann, a Labour politician and among the panel of lawmakers who this week will question Diamond and Agius, said Monday on Sky News, "He (Diamond) must resign. He"s got to go. There is no role for people like him if banking is to be trusted again in this country and if British banking is to restore its tarnished reputation in the world, which of course is of great importance to our economy."
Agius will lead the bank temporarily and help search for a new CEO.
Barclays' board, trying to do some damage control, announced it would begin an audit of the financial services firm's business practices.
That plunge took many traders, talking heads and politicians by surprise.
Our "leaders" in Washington D.C. were heard to say: "Nobody saw this coming."
Well, that's just not true. Not one iota.
If you've been reading Money Morning you saw this coming. So did tens of thousands of our Money Map Report subscribers.
I've been warning that 10 year yields would drop below 2% then hit 1.5% for more than 2 years now.
In fact, our readers had the opportunity to profit handsomely on our bond related recommendations that have earned them 30%-71% so far.
What does this mean for you?
First questions first...
Now that we've busted 1.5%, the next stop is 1%.
I can even see negative yields ahead, meaning that investors who buy Treasuries will actually be paying the government to keep their money.
Be prepared. I'm going to show you here what to do and - yes -how you can profit from this move-- even at this stage of the global financial crisis.
Why Bond Yields Will Continue to FallFirst off, 10-year yields dropping to 1% means several things:
- Bond prices go even higher. Rates and prices go in opposite directions. Therefore when you hear that yields are falling, this means that bonds are in rally mode.
- The world is more concerned with the return of its money than the return on its money. You can take your pick why. Personally I think it comes down to two things above all else: the looming disintegration of the Eurozone and the fact that our country is $212 trillion in the hole and warming up for another infantile debt ceiling debate instead of reining in spending.
- More stimulus. Probably in the form of a perverse worldwide effort coordinated by central bankers as part of the greatest Ponzi scheme in recorded history.
It's a complicated, fancy term in the global banking complex. Yet it's one you need to know.
And if you understand it, you will get the scope of the risks we currently face - and it's way bigger than just Greece.
So follow with me on this one. I guarantee that you'll be outraged and amazed - and better educated. You'll also be in a better position to protect your assets at the end of this article, where I'll give you three important action steps to take. So follow along...
Confronted with the opportunity to enact meaningful change to the regulatory system, the Fed punted on its responsibility to protect the public from the very banks that brought down the global economy.
This once again proves that the Fed, far from being a guardian of public welfare, is actually on the side of big banks.
"The Fed is an agent of the banks and, as such, it continues to come up with new ways for them to make money, risk free," said Money MorningCapital Waves Strategist Shah Gilani.
This time, instead of proposing strong guidelines that would actually do something to avoid another crisis caused by too-big-to-fail banks, the Fed put forth a plan that lacks key details and leaves important decisions in the hands of international regulators in Basil, Switzerland.
Specifically, the Fed proposal is hazy on capital requirements and minimum liquidity levels, which are crucial to ensuring a bank survives a financial emergency.
Delay has been a common theme for agencies charged with creating the regulations set out in Dodd-Frank. As of the beginning of December - 18 months after Dodd-Frank was signed into law - fewer than 25% of its hundreds of new rules have been finalized.
On Tuesday, it was the Commodity Futures Trading Commission (CFTC)voting to delay until July of next year regulations governing derivatives - the financial instruments that were at the very heart of the 2008 financial crisis.
And by forfeiting its chance to effect change, the Fed left the United States even more vulnerable to another financial crisis.
Now, not only have these vital regulations been delayed, but the process gives well-connected Wall Street bankers three months to "comment" - read "influence" - on the proposals.
Following the Fed's announcement, the banking industry didn't seem particularly worried that the finished regulations, when they do arrive, will cause them much of a headache.
"While these rules will require considerable review and comment from the industry, we are pleased to see the Fed is taking a phased-in approach to a number of these measures," Ken Bentsen, an executive vice president the Securities Industry and Financial Markets Association trade group, told Bloomberg.
A headline on CNBC summed it up nicely: "Banks Breathe Sigh of Relief Over New Fed Rules."
Indeed, Wall Street isn't concerned because at the end of the day, it knows the Fed is its ally.
"The average American has no idea how protected the big banks in this country really are," said Money Morning's Gilani. "Maybe that's because the biggest bank in the world is the U.S. Federal Reserve. And it happens to be a creation of - and 100% beholden to - the banks that it is a master shill for. It also lies to us and covers up Wall Street's misdeeds."
Indeed, the regulators that are supposed to be protecting us from a repeat of the 2008 financial crisis can't - or refuse - to get the job done.
In fact, just yesterday (Tuesday), the Commodity Futures Trading Commission (CFTC) voted to move the effective date for rules that would add oversight to the $600 trillion derivatives market to July of 2012.
Derivatives were one of the primary culprits in creating the financial crisis in 2008.
Originally the regulations were to go into effect on July 16 of this year, but the CFTC pushed the date back to Dec. 31. And now, regulations of the item most responsible for the 2008 meltdown won't go into effect until two years after Dodd-Frank was enacted and nearly four years after the crisis occurred.
Other agencies responsible for finalizing the rules set forth in Dodd-Frank, such as the Securities and Exchange Commission (SEC) and the U.S. Federal Reserve, have been just as derelict in their duties.
In short, nothing has been fixed.
As Bad as Ever"The structural problems are worse," Simon Johnson, a professor at the MIT Sloan School of Management and a former chief economist at the International Monetary Fund (IMF) told the Huffington Post. "[The institutions'] size, incentives -- none of that has changed."
Meanwhile, American citizens still suffering from the fallout of the last crisis are left to worry about vulnerabilities in the system and the ramifications of having a group of financial institutions that are still "too big to fail."
Another financial meltdown, on par with what we saw in 2008, is looming large on the horizon.
One of two potential triggers could ignite a new banking crisis, a rapid contagion, and a second financial meltdown:
- One or more of the troubled European countries could default outright.
- Or a major money center bank could be turned away from the interbank borrowing market by its peers.
And it would spread like wildfire.
The threat of a banking crisis leading to a meltdown centers on Europe. European banks hold huge amounts of their home sovereign's debt, as well as debt of their Eurozone neighbors.
So when default risk rises for any sovereign in the euro area, every one of the region's banks feels the impact on their balance sheets.
Of course, it may not be immediately reflected in write-downs because many banks hold sovereign bonds in their "held-to-maturity" books, as opposed to accounting for them in their "available-to-trade" books.
Being held to maturity means bonds are accounted for at amortized cost as opposed to being marked-to-market, as they would have to be in the trading book.
This is a double-edged sword for banks. Banks don't have to mark down bonds in the long-hold book unless they become "impaired." But in an uncertain market, fearful investors may hammer a bank's stock because its true exposure to bad debt is unknown.
A less obvious spillover of holding so much sovereign paper is that banks use those sovereign bonds as collateral to borrow from other banks in the short-term funding markets. As the value of sovereign collateral comes into question, it can be haircut (reduced in value as collateral) drastically, or not accepted at all.
Banks right now want solid collateral from the counterparty banks to which they are lending their funds. And since lenders already own huge amounts of sovereign debt, they are starting to turn away distressed sovereign paper as inadequate collateral.
When that happens, banks in need of funding are forced to turn to central banks. And that's where it gets really scary.
Better Business Bureau - With offices nationally, in every state and most large and mid-sized cities, the BBB can alert you to problems with local businesses, work-at-home programs, distributorships, sales routes you can buy and other one-on-one type rip-offs. They usually have lists of current online offers that are suspect or drawing lots of complaints. You can access the national BBB Web site at http://www.bbb.org/us/
and navigate to your home state or city chapter from there.
U.S. Securities and Exchange Commission (SEC) - Information is available on all securities-related fraud issues and investment scams, and you can file your own personal complaints or suspicions online at http://www.sec.gov/complaint.shtml. You can write them at: Securities and Exchange Commission, Office of Investor Education & Assistance, 450 Fifth Street, N.W., Washington, D.C. 20549-0213, or fax a complaint to 202-942-9634. You also can verify financials and regulatory standing on all publicly traded U.S. companies by accessing the SEC's EDGAR Database at: http://www.sec.gov/edgar.shtml.
Your SEC complaint can be anonymous or you can provide only limited personal data. However, the more information you give them, the more likely they'll be able to help you. Either way, include specific details about how, why and when you were bilked with any contact info you have on the fraudulent person or company involved.
Indeed, over the past 40 years, only one new entry has been added to the Federal Bureau of Investigation (FBI) roster of "Top 10" investment scams - the very broad category of "Internet fraud." The other financial rip-offs listed are merely new versions of tried and true swindles that have been around for decades or more - from Ponzi schemes and pyramid systems to phony stock offerings and commodity cons.
The big difference is that the one new category - Internet fraud (and the computers on which the Internet operates) - has greatly increased the frequency, speed and effectiveness of the other types of financial fraud, as well as exponentially increasing the scammers' take.
"Brokers will tell you that particular state and municipal bond issues are 'safe,' meaning that they are rated highly by the rating agencies," said Hutchinson. "However, the rating agencies got it wrong on subprime mortgage instruments, and it seems pretty clear that they are getting it wrong on states and municipalities."
On the municipal level, local property taxes are the primary revenue source. Declining home prices and increased mortgage delinquencies are creating a housing market that offers little local revenue. Municipalities are then left struggling to make ends meet.
Hutchinson said the vicious cycle could send municipal-bond defaults soaring past 2009's $6.4 billion.