More Leverage Baby!!

It wasn't enough for Barney Frank to put the US Taxpayer on the hook for the US Mortgage Market, via Freddie, Fannie, TALF, TARP and PPIP, he now wants to have the US Taxpayer guarantee all Municipal Bond offerings.

This will lead to a bonanza of new debt offerings by municipalities. They will isssue infinite debt to raise as much money as they can before the Federal Government goes bankrupt under the weight of all the debt they create.

online.wsj.com/article/SB123993403283927985.html

Credit Default Swap and derivatives were created to allow banks to issue debt at artificially low interest rates. The thought was that the investor could buy the bond with a low interest rate because the risk of losing money via default was offset by the insurance created in the CDS market.

How well did that work? Now that the system has blown up, the Government is trying to engineer a new wave of cheap debt financing via yet another round of CDS driven debt offerings. This itme though, they are using fraudulent accounting and pricing manipulation to hide risk and keep rates low.

Unintended (Intended) Consequences
The size of the Derivative Market actually INCREASED in size from $175.8 trillion to $200.4 trillion in Q4 2008 (page 9 of 33)!

I think that is because banks now recognize that if their derivative bet fails, then the US Government will bail them out. Sickening...

Goldman Sachs
Goldman had virtually zero derivative exposure in Q3 2008, but ended Q4 2008 with $30.2 trillion (4th largest exposure).

Their derivative exposure went from 4% of "Risk Based Capital" in Q3 2008 to 1,056% in Q4 2008 (page 13 of 33).

This is the leverage game again. I have no clue what Goldman is doing with all of this derivative exposure, but in my opinion, Goldman is the de facto trading arm of the US Treasury, so maybe the Treasury is using Goldman to buy derivative contracts from other banks at artificially high prices to pump them full of additional capital at taxpayer expense. Look for a new scandal.

http://www.occ.treas.gov/ftp/release/2009-34a.pdf

This new wave of leverage will lead to significant asset appreciation (increasing prices) and significant inflation. As an investor, you need to make money to pay the higher taxes that will be coming AND to stay ahead of the consequences of rising inflation.