Money And Change

The Dangerous Zombie Infestation (Of The World Economy)
ZeroHedge.com      Mon, 03/11/2019 - 19:55

Submitted by Tuomas Malinen of GnS Economics

It is estimated that over 14% of companies in the S&P 1500 are zombies. In China, roughly 20 percent of A-share listed companies on Shanghai and Shenzhen exchanges are zombies. In the developed economies, approximately 12 percent of all non-financial companies are ‘zombies’. Only 30 years ago, this share was just 2 percent.

These are stunning figures.  How did we get there? What is behind the worrying phenomenon of zombification?

The risks of this zombie infestation to the economy and markets are also widely misunderstood and mostly ignored at the moment. They should not be. The large share of zombie companies creates the possibility of the spontaneous collapse of both global asset markets and economy.

“They’re coming to get you, Barbara!”

Zombies were introduced in the economic jargon by Caballero, Hoshi and Kashyap (2008) when they described the unproductive and indebted—yet still operating—firms in Japan as ”zombie companies”. They found that, after the economic crash of the early 1990’s, instead of calling-in or refusing to refinance existing debts, large Japanese banks kept lending flowing to otherwise insolvent borrowers (aka zombies).

Zombies companies restrict the entry of new, more productive companies, diminish job creation in the economy and lock capital into unproductive uses. In a word, they are a menace to the economy and society.

According to current academic research, the biggest factor in the creation of zombie companies is the health of banks. When they are fragile and unable to cope with loan losses, banks start to evergreen debtor companies. That is, weak banks support ailing companies, which support each other. This is why low interest rates foster zombie creation. Low (or negative) interest rates make banks weaker, by restricting their profits, and they provide cheap loans to zombie companies to avert losses.

However, there’s also another channel: money conjuring. When central banks enacted their QE programs, it led to a fall in yields (and a rise in prices) of the broad bond universe. For example, the yields of US corporate bonds started to fall immediately, despite the recession, after the Fed enacted its initial QE program in November 2008.

Therefore, QE programs led to an increase in zombie companies both through the banking sector and the capital markets. Central banks are thus directly responsible for the global ‘zombie infestation’ and behind

Firestarter?

As the sudden fall of global conglomerate Steinhoff shows, we do not know for sure how widespread the zombie-infestation is. Large companies can use different accounting gimmicks to hide their losses until, suddenly, the dam breaks and the company fails.

Because zombie companies can fail at any time, and because identifying a zombie company is very difficult, they create a huge risk for private investors, the global economy and global asset markets. When zombie companies finally start to fail in more significant numbers, it is likely to quickly cascade in an avalanche of bankruptcies with broad and serious negative impacts. What could be the trigger?

According to the Bank of International Settlements, a downgrade of the vast BBB-rated corporate bond universe in the US and in Europe could lead to a liquidation fire-sale. Interest rates would skyrocket and, in the worst case, “passive” investors panic-selling illiquid bond ETFs could create a bidless market for corporate debt securities. This would lead to the collapse of the whole corporate bond market taking the stock market with it. A deep recession would instantly follow.

The zombie infestation is so dangerous because it has the possibility of precipitating the implosion of the ‘everything bubble’ central bankers have been inflating for the past 10 years. All that is needed is an event that spooks investors.

In the modern inflated late cycle markets, this could be something very small, like a credit downgrade, or something larger, like the bankruptcy of a major company. All that is needed is a spark, a ’Firestarter’, for the firestorm to begin.

Experts: NYC Could Go Bankrupt for First Time in 40 Years
 
Breitbart.com      10 Mar 20198,917
2:04

New York City is headed for financial ruin and could go bankrupt for the first time in 40 years, financial experts say.

Financial experts predict that there are already signs the city is headed for financial disaster, as many individuals and businesses are leaving the city for lower tax areas and city government spending is at an all-time high.

The last time the city came close to filing for bankruptcy was in 1975 when former President Gerald Ford refused to give the city a bailout package to settle its debt. “The city is running a deficit and could be in a real difficult spot if we had a recession, or a further flight of individuals because of tax reform,” economist Milton Ezrati told the New York Post. “New York is already in a difficult financial spot, but it would be in an impossible situation if we had any kind of setback.”

The city’s budget deficit has reached an all-time high over the past year. New York City’s long-term liabilities— including pensions, bonded debt, and retirement benefits for city government employees— reached a record-high $257.3 billion, according to an October 2018 Citizens Budget Commission report.

Even though the city’s budget deficit has reached record highs, Mayor Bill de Blasio has shown no signs of curbing the city’s spending.

In fact, de Blasio is adding $3 billion in spending to the current $89.2 billion budget, and spending money at a rate that is three times the rate of inflation, according to the Post.

It also appears that de Blasio will not get help from fellow Democrat Gov. Andrew Cuomo, who is trying to address a $2.3 billion state budget deficit by using auditors to bill wealthy residents fleeing the state for lower-tax regions.

Cuomo’s preliminary budget proposed $600 million in cuts to money allocated to New York City.

Eric Holder didn't send a single banker to jail for the mortgage crisis. Is that justice?

US attorney general’s tenure has proven unhelpful to the five million victims of mortgage abuses in the US

Guardian.co.uk      David Dayen

Thu 25 Sep 2014 16.11 EDT Last modified on Fri 14 Jul 2017 17.54 EDT

The telling sentence in NPR’s report that US attorney general Eric Holder plans to step down once a successor is confirmed came near the end of the story.

“Friends and former colleagues say Holder has made no decisions about his next professional perch,” NPR writes, “but they say it would be no surprise if he returned to the law firm Covington & Burling, where he spent years representing corporate clients.”

A large chunk of Covington & Burling’s corporate clients are mega-banks like JP Morgan Chase, Wells Fargo, Citigroup and Bank of America. Lanny Breuer, who ran the criminal division for Holder’s Justice Department, already returned to work there.

In March, Covington highlighted in marketing materials their award from the trade publication American Lawyer as “Litigation Department of the Year,” touting the law firm’s work in getting clients accused of financial fraud off with slap-on-the-wrist fines.

Holder has a mixed legacy: excellent on civil and voting rights, bad on press freedom and transparency.

But if you want to understand what he did for the perpetrators of a cascade of financial fraud that blew up the nation’s economy in 2008, you only have to read that line from his former employer: he helped them “get the best deal they can.”

As for homeowners, they received a raw deal, in the form of little or no compensation for some of the greatest consumer abuses in American history.

Before Holder became Attorney General, banks fueled the housing bubble with predatory and at times, allegedly fraudulent practices.

As far back as 2004, the FBI warned of an “epidemic” of mortgage fraud, which they said would have “as much impact as the Savings & Loan crisis.”

They were wrong; it was worse.
 
Brian T Moynihan, chief executive officer of Bank of America Corp, one of the banks accused of extensive mortgage abuses. Very little of the money from its settlements has gone to help homeowners. Photograph: Bloomberg via Getty Images And banks and lenders carried through that fraud to every level of the mortgage process. They committed origination fraud through faulty appraisals and undisclosed trickery.

They committed servicing fraud through illegal fees and unnecessary foreclosures.

They committed securities fraud by failing to inform investors of the poor underwriting on loans they packaged into securities.

They committed mass document fraud when they failed to follow the steps to create mortgage-backed securities, covering up with fabrications and forgeries to prove the standing to foreclose.

By the time the bubble collapsed, the recession hit and Holder took over the Justice Department, Wall Street was a target-rich environment for any federal prosecutor. Physical evidence to an untold number of crimes was available in court filings and county recording offices.

Financial audits revealed large lapses in underwriting standards as early as 2005. Provisions in the Sarbanes-Oxley Act, passed during the last set of financial scandals in 2002, could hold chief executives criminally responsible for misrepresenting their risk management controls to regulators.
Any prosecutor worth his salt could have gone up the chain of command and implicated top banking executives.

In 2009, Congress passed the Fraud Enforcement and Recovery Act, giving $165m to the Justice Department to staff the investigations necessary to bring those accountable for the financial crisis to justice.

Yet, despite the Justice Department’s claims to the contrary, not one major executive has been sent to jail for their role in the crisis.

The department has put real housewives in jail for mortgage fraud, but not real bankers, saving their firepower for people who manage to defraud banks, not for banks who manage to defraud people.

Most of the “investigations” of financial institutions over the past six years have swiftly moved to cash settlements, often without holding anyone responsible for admitting wrongdoing or providing a detailed description of what they did wrong.

The headline prices of these settlements usually bore no resemblance to the reality of what they cost the banks.

The National Mortgage Settlement, for example, was touted by Holder’s Justice Department as a $25bn deal. In reality, banks were able to pay one-quarter of that penalty with other people’s money, lowering principal balances on loans they didn’t even own.

Other penalties featured similarly inflated numbers that didn’t reflect the true cost. Banks could satisfy their obligations under the settlements through routine business practices (including some, like making loans to low-income homeowners, that make them money).

A recent series of securities fraud settlements with JP Morgan, Bank of America and Citigroup, which DoJ said cost the banks $36.65bn, actually cost them about $11.5bn. And shareholders, not executives, truly bear that cost.

Incidentally, the Wall Street Journal found last week that the Justice Department only collects around 25% of the fines they impose. So the banks may have gotten off even easier.

These settlements have actually perverted the notion of justice, turning accountability into a public relations vehicle. And Holder’s Justice Department has been guilty of cooking the books: they admitted last August to overstating the number of criminal financial fraud charges by over 80%.
The DoJ’s Inspector General criticized this in a March report, and also found that DoJ de-prioritized mortgage fraud, making it the “lowest-ranked criminal threat” from 2009-2011.

As for homeowners, the biggest victims of Wall Street misconduct, they received little relief. Victims who already lost their homes got checks in the National Mortgage Settlement for between $1,500-$2,000, compensating people wrongly foreclosed upon with barely enough money for two month’s rent.

Despite claims that 1m borrowers still in their homes would get principal reductions under the settlement, when the final numbers came in this March, just 83,000 families received such a benefit, an under-delivery of over 90%.

Considering that over five million families experienced foreclosures since the end of the crisis, that relief is a drop in the bucket.

For those still eligible for relief, thanks to the expiration of a law called the Mortgage Forgiveness Debt Relief Act, any principal forgiveness will count as earned income for tax purposes, meaning that homeowners struggling to avoid foreclosure will subsequently get hit with a tax bill they cannot afford.

The Justice Department only recognized this belatedly, creating a fund in a recent Bank of America settlement to “partially” defray tax costs.

For others without that benefit, the help the Justice Department provided will look more like harm.
More important, the settlements didn’t end the misconduct.

Homeowners today continue to lose their homes based on false documents. Because the Justice Department just put a band-aid over the fraud, and didn’t convict any of the ringleaders, the problems went unaddressed, and the root causes never got fixed.

In fact, the entire banking sector’s get-out-of-jail free card gives them confidence that they could commit the same crimes again, with little if any legal implications.

The decision to protect banks instead of homeowners should be laid at the feet of the president and his administration, not one man in the Justice Department. But Holder certainly carried out the policy, even if he didn’t devise it.

We’ll soon find out if Holder merely presided over DoJ in a pause between helping corporate clients at Covington & Burling. But the failure to prosecute during his time in office certainly makes it look like Holder’s sympathies were with those clients even while serving as attorney general.

The Debt Accrued Through Dollar Hegemony Is Unpayable (Except In Hyperinflated Dollars)
ZeroHedge.com      Fri, 03/01/2019 - 22:25
 
Authored by Michael Doliner via Counterpunch.org,

The United States Entity lost the war in Iraq. That fact determines the Entity’s position in the Middle East today.

After having destroyed Saddam’s army and dispossessing the Sunnis in favor of the Shi’ites, after Abu Ghraib and it’s indelible pictures, after the total destruction of Fallujah, in short after a victory achieved with the utmost brutality, contempt and humiliation of Iraq and Iraqis, the Entity was in charge. Then the “insurgents” appeared. They put improvised explosive devices along the roads so, with a phone call, they could destroy patrols of the Entity. They made car bombs so that every vehicle approaching a check-point might spell doom. They donned suicide vests to blow themselves and any nearby Entity soldiers up. Entity soldiers couldn’t go into the streets. Every move they made could be their last. The enemy was everywhere and nowhere. These people would rather die then be ruled by these idiotic mechanized barbarians. Everything seemed peaceful, but at any moment, out of nowhere, they could be blown to pieces.

That kind of thing wears on you. Their patrols, pointless bouts of Russian roulette, ended up as parked “search and avoid” missions. Life went on without the clanking monsters. Entity bases were like Kaposi sarcoma in AIDS patients. The Entity’s attempts at reconstruction were comically inept – roads to nowhere and chicken processing plants for chickens no one wanted. In short the Entity’s occupation of Iraq after the victory, other than being a disaster of comical incompetence, was non-existent. Muqtada Al-Sadr, the Shi’ite cleric, had much more power than the Entity. Eventually Iraq rejected the Entity’s status of forces agreement (SOFA). In other words the Iraqi puppets the Entity had installed unceremoniously kicked the Entity out of the country.

Until that time the Entity had been running a protection racket in the Middle East. But after the loss of Iraq these threats seemed a lot less plausible. The game was: oil had to be sold in dollars. Know as Dollar Hegemony, this racket allowed the Entity to print money. Oil backed the dollar just as gold once had. Governments had to maintain large supplies of dollars to protect against “emergencies,” that is, dollar shortages during speculative attacks on their currencies. “To prevent speculative and manipulative attacks on their currencies, the world’s central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation.” The Entity enforced dollar hegemony with military threats. One of the most important reasons for the Entity’s attack on Iraq was Saddam’s abandoning of dollar hegemony. He had begun to sell oil in euros. The Entity had to stop that. It invaded, and as soon as it was victorious, reversed that policy. Dollar hegemony restored. But the loss in Iraq revealed The Entity’s protection racket as a bluff. It’s threats were suddenly unconvincing.

Pressed by Entity sanctions, Iran began to sell oil for other currencies after 2007. The Entity was not going to invade Iran! A look at the map reveals just what a catastrophe that would be. As soon as hostilities started, even before a shot was fired, no one would insure tankers going through the Straits of Hormuz, and the tanker owners would not send them through without insurance. Twenty percent of the world’s supply of oil would disappear with no more military action than the commencement of hostilities. The world economy would tank, and this time fall into chaos. There was no way the Entity could even think about occupying Iran after the debacle in Iraq. And there was no way to protect The Entity fleet in Bahrain. They would be sitting ducks anywhere in the Persian Gulf. If they were destroyed the Entity would lose unless it launched nuclear weapons. World War III would be on. Only madmen would even consider doing this.

The Entity had abused dollar hegemony over the years by simply printing dollars. The Entity ran huge trade deficits every year. China, Japan and all other countries had had to keep reserves of dollars if they were to purchase oil and protect their currencies. These were like never- having-to-be-repaid loans to the Entity. If other currencies could be used they would dump these reserves because the only thing preventing inflation of these dollars had been dollar hegemony, backing the dollar with oil. Iran doing business in non-dollar currencies is like a leak in a dike.

Russia, China, India and Japan are now unloading dollars carefully, so as not to cause a panic. But they are steadily unloading them. They see dollar hegemony disappearing. Naturally, Saudi Arabia sees what is happening, and is not that enamored of the dollar either. As long as they thought the Entity protected them from Iran and, of course, from the Entity itself, they went along with it. Now the Entity is impotent to enforce dollar hegemony. The dollars the Saudis take for their oil today will be worth a whole lot less tomorrow if dollar hegemony ends. They are wavering, especially after Trump scolded them for murdering Kashoggi. Naughty, naughty MBS. They know the Entity cannot protect them from Iran, and they are panicking.

The Entity’s hive mind, for it’s part, refuses to accept the Iraq failure as having revealed its weakness. It still wants to maintain dollar hegemony and its protection racket. The end of dollar hegemony is an existential threat to The Entity. Originally The Entity exchanged securities for these dollars, one piece of paper for another, or more likely bits of code, with the Federal Reserve. Then it spent them, mostly on the military. The Federal Reserve unloaded these dollar-denominated securities to whoever had faith in the dollars they could exchange them for. Nice work if you can get it, but securities are debt. The Entity is so far in debt that it pays almost a trillion dollars in debt service annually. To do so it needs more dollars and to sell more securities. Faith in this Ponzi scheme might waver. If everyone unloads dollar securities the entity will have to print more dollars, and sell more securities to buy them. Otherwise their price will crash. But what real something or other will these dollars buy given how many will be floating around? For there will be no other buyers unless the dollars can buy something real. The Securities will then be worthless. If Entity securities become worthless so will the dollar. Bye-bye Entity.

The hive-mind’s strategy is to simply deny what has happened, the ostrich maneuver. The Entity didn’t lose in Iraq, it hasn’t as a consequence lost all credibility in the Middle East, dollar hegemony is salvageable, and the Entity might still attack Iran after all. The continuation of dollar hegemony requires a world in which Humpty-Dumpty gets back together.

If only Iran could be put back in the box of dollar hegemony all would go back to what it was. In 2012 the Entity blocked Iran from the SWIFT messaging system for making international payments as punishment for straying from dollar hegemony, the first time that system had ever been used politically. It froze Iranian funds and the trust required for international banking was destroyed. However, Iran continued on its wayward path. Now the Entity withdraws from the JAPOCA, which was very beneficial to all other signers. Obedience to the Entity’s sanctions against Iran is bringing the interests of much of Europe into conflict with those of the Entity.

Without dollar hegemony the dollar will hyper-inflate and destroy the Entity. To restore dollar hegemony it was thought essential that Iran return to the dollar hegemony fold. Why then did Obama sign the treaty with Iran, the JAPOCA? Obama signed the Iran Treaty because of Hassan Rouhani and his party. Rouhani, as President of Iran, was a “moderate” and he had succeeded Mahmoud Ahmadinejad, the notorious hardliner who refused to even negotiate with the Entity. Ahmadinejad had called directly for the end of dollar hegemony. Rouhani won by arguing that he could relieve Entity sanctions on Iran through negotiations. Obama must have hoped that Rouhani could restore Iran to the dollar-hegemony fold. Perhaps a little coup d’état. He was, Obama must have hoped, our man in Tehran. The JAPOCA, which would relieve Iran of some sanctions, would prove to Iran that going along with Entity wishes, in particular dollar hegemony, was good for them. Rouhani was the guy who promised good things for Iran from a rapprochement with the Entity. Without the successful negotiation of the JAPOCA, Rouhani would fail.

The actual contents of the Iran deal, with its various detailed restrictions on Iranian nuclear research and enrichment of Uranium, was a drawn-out shadow play. In the end, Obama demanded only what Rouhani could give. Neocons in the shadows complained that he gave too much, as has Trump. Ahmadinejad, on the Iranian side, said it wouldn’t work, and complained that Iran got too little. In any case it was all a shadow play. Iran had no program to develop nuclear weapons. American Intelligence Agencies all agreed that it had been abandoned in 2003. Actually, it had never existed. Nevertheless, the two sides hammered out various conditions, dragged out the negotiations interminably, and carefully crafted the agreement to be acceptable to both sides. All of this was to present an appearance that would strengthen Rouhani and protect Obama’s rear. Only the lifting of some Entity sanctions was real. That was Rouhani’s win, and in return Rouhani would, Obama hoped, return Iran to the fold or at least “pave the way.”

But Rouhani would not or could not do any such thing. Although he did want to open Iran to the West, he would not restore dollar hegemony. When Rouhani did not do what the Entity hoped, it abandoned him and with him the JAPOCA, which Obama signed only to prop him up. That was the end of any hope for a Ukraine style regime change in Iran. At that point the Entity had to reestablish itself as the bully of the Middle East, which meant it had to threaten to attack Iran. Otherwise even Saudi Arabia, mortally afraid of Iran, wavering on dollar hegemony, and no longer believing in Entity protection, might itself abandon dollar hegemony. That would be curtains.
Earlier this year, the Chinese Ambassador Li Huaxin was pictured with Saudi officials as he praised Saudi Arabia’s Vision 2030, which calls for stronger economic cooperation between the two nations. This pact pressures Saudi Arabia to adopt the “petro-yuan,” which would effectively axe the petrodollar. Although Saudi Arabia relies heavily on U.S. military power, Saudi Arabia warming ties with China closeness are alarming. China’s growing economy and standing in the world could undermine the attitude towards the United States. Above anything else, a shift in alliances could threaten America’s standing in the Middle East and world.

The Entity, unable to face the truth, pretended its position in the Middle East had not changed. It had to punish misbehavior. Withdrawal from the JAPOCA was the first step, even though everyone admitted that Iran had not breached the agreement. Withdrawal from a signed agreement made the Entity no longer “agreement capable”, as Putin commented, for no one could trust its word. Trump’s blathering about a new agreement was nonsense. Diplomacy, for the Entity, is henceforth “off the table.” Europe’s slavish obedience to the Entity exposed its governments as puppets of the Entity to the benefit of the rising pan-European nationalist sentiment hostile to Entity hegemony. The Entity had to reignite its threats against Iran. But this just revived Obama’s dilemma, for the Entity cannot attack Iran without igniting WWIII.
 
With the credibility the Entity had had while it pretended to be the United States gone, and attacking Iran impossible for any sane entity, Trump is left with only one option if he is to maintain dollar hegemony: to go insane. The only alternative to going insane is to not attack Iran, allow dollar hegemony to dissipate (as is inevitable anyway), and so end The Entity– for the debt accrued through dollar hegemony is unpayable, except in hyperinflated dollars.