Pandora's Box of Toxics

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Includes: FXE, GS, IEV, KBE, KRE, XLF
by: Ilargi

As the European situation looks more dire and confusing by the day, and a sinister web of accusations and legal challenges spreads from Goldman Sachs (NYSE:GS) through the rest of Wall Street, what do the stock markets do? Of course they’re dancing on their tables, party hats and all. So to speak. By now it may be time to really start wondering who’s buying all those shares. Anyone not involved in manipulation should perhaps have their heads examined. Leigh Skene at Lombard Street Research thinks it’s the very Wall Street investment banks which face increasing scrutiny that purchase the shares and keep the sputtering machinery afloat. He may well be right. Does that mean they’re buying stocks with your TARP funds? That, too, may well be right.

Still, what future is there in a scheme such as that, which "solves" a bank debt problem by turning it into a sovereign debt one, only for as long as the charade can last? And how long can it last? Well, look, our economies need a modest growth rate at all times just to keep from from spontaneous crumbling. If we were to pay off our debts, they would have to expand probably somewhere in the double digit percentages. For years to come.

But even then, we'd figure out at some point that paying off the debt is an illusion, a receding horizon the end of which, and the pot of gold, we'll never reach. It’s easy to pretend we can pay it off as long as interest rates keep being forced down artificially by governments and central banks operating under the illusion that it’s they who set the interest rates. Pretense like that, however, is as fleeting as it is temporary. The Acropolis is a fine place to find out how true that is, and why. Meanwhile, we’ve truly come to live in a financial hologram.

Let's see how all our genius economists and politicians fare once the bond markets push up interest on debt three or four-fold in your society too. Who will offer you bail-outs and loans when that time comes? Think you won't need them? Think again. Really, do. Even with ultra-high growth and ultra-low interest rates it would take many years to solve the debt in all but a few western nations, years in which austerity would have to be the leading principle. But austerity hinders growth, and it hinders our lifestyle. So we’re not going to pick that option unless and until we’re forced to, like it’s going to be forced on the Greek population soon. And then we’ll react like them too: we’ll be fighting in the streets.

If it’s the investment banks (and Fed, and Treasury) that keep the stock markets alive, what is likely to happen when the investigations and lawsuits move from civil to criminal, growing in number like so many bacteria in a petri dish? And what will become of the trillions of dollars that our governments handed to them? Will we get it back?

Finally, finally, there are people looking into the dealings of the main US ratings agencies, Fitch, S&P and Moody's, which have doled out AAA's for, or so it seems, anything that moves -money-. As is the case with SEC vs Goldman, a first official accusation against even one of these agencies could open and break the levees that hold Wall Street above water. Every single AAA rating given to a piece of crap paper, and there've been thousands upon thousands of them, is a potential court case. The individuals and institutions who've bought the stuff (invested?!) have often lost huge amounts of money, and will think nothing of a few million in lawyers' fees. Next step: the regulator for the agencies. When did they know what was happening? And so why was nothing done?

TARP Special Investigator General Neil Barofsky may be the first to open up Pandora‘s box of toxics for real: he threatens to go after the New York Fed for their actions in the AIG case. If this plays out the way it should, large swaths of government will be too mired in legal threats to do much governing while few or none of the main banks will be able to do anything but defend themselves in courtrooms.

In that light, it would make sense if either the courts become a massive sideshow to divert attention from the deteriorating economy, or they'll all just decide at one point that it's easier to simply let the economy go off a cliff, so no-one has time or money left for endless expensive litigation. If the debt is threatening to be forced out of the vaults and closets, a process lawyers can at least accelerate, all bets are off, and survival mode will kick in.

Disclosure: No positions