Are All the Large Banks Insolvent?

Last Thursday, the Lehman bankruptcy court's examiner report was filed.  It was undertaken by Anton Valukas of Jenner and Block; it took a year, is over 2200 pages, and cost 38 million well spent dollars.  The Baseline Scenario has since posted an excellent, brief synopsis of the more relevant sections.  Yves Smith of naked capitalism was one of the first to respond with emphasis on the collaboration of the New York Fed under Geithner, which allowed a series of lowered criteria stress tests to be performed on Lehman and ignored they failed.

Washington'sblog concentrated on the fraudulent aspects of the cooking of the books and the failure of the Fed and the accounting firm, Ernst & Young to sufficiently act on what they knew.  Karl Denninger of MarketTicker espoused the judgment that this proves all large banks are insolvent as the result of fraudulent accounting and government cover up and he was according liquidating all of his long positional trades as a direct result.

We briefly discussed the above on last Saturday's radio show, but did not have the time we would have liked for this subject, because this report shows serious, deep failures of the financial and regulatory system to curtail blatantly fraudulent activities much less systemically dangerous.  How fraudulent?  Can you say ":Enron"?  With Enron, their independent auditor, Arthur Anderson, went out of business, although it was ultimately found they were not as liable as originally alleged.  Unfortunately, it is not uncommon for auditors, particularly if a very large and prominent or otherwise important client is involved, to not press issues or dig deep enough if the client is adamant in their position and the issue involves a technical call decision on facts which are not black-and-white caught in the spot light.  But Ernst & Young had information from a whistleblower, had questioned the transactions, kicked the issue up their own organizational ladder, and ended up going along with it.

Some people are calling for Fuld as the Lehman CEO and Lehman financial officers to be charged with fraud.  Fuld has already denied any knowledge of how the Repo 105 transactions happened improperly.  Basically, they took a financing transaction which should have been reported on both sides of the balance sheet and recorded it as a sale taking it completely off the balance sheet.  Authorities should not only be looking at former Lehman officers but the Board of Directors also.  If members of the New York Fed knew of these transactions, they are complicit.

The Valukas report also questions if JP Morgan Chase, whose CEO, Jaime Dimon, sits on the Board of the New York Fed, made collateral claims in the days just prior to the Lehman failure which put it in an over collateralized position and may have contributed to the failure.  We already know that Joseph Stiglitz believes the Fed district banks are working conflicts of interest with bankers regulating bankers.  How much did Jaime Dimon know about Lehman from his position as a Director of the New York Fed. and did he use it to protect JP Morgan Chase?

Frank Partnoy has questioned whether Lehman was too complex to do anything but fail, because the Valukas report cites numerous valuation problems.  To Partnoy this implies Lehman did not know how to value its trades, assets, and liabilities.  To me, I find it impossible to believe that the Lehman employees and officers did not understand exactly what they were doing.  It was done extensively and repeatedly to such an extent that the Board of Directors had to know enough, at the very least, to not ask.

We have repeatedly discussed the role of Treasury and the Fed in getting regulatory authorities to allow the banks to fraudulently represent their balance sheets while they rebuild their capitalization with new stock and debt issuances.  They have enjoyed the "legal" deferral of proper accounting of assets and transactions which, if practiced by any other business entity would result in terminal fraud charges.  They have been allowed to carry toxic assets on their books at exaggerated valuation.  Repo 105 transactions are not the only type of financial transaction that could have been utilized by any bank to misrepresent value and hide leverage in any of the gray areas of FASB 140 or other financial transactions and trades utilizing off balance sheet entities or other willing companies desiring to make a few basis points quick profit.

The brush fire which has ensued from the Valukas report has started to encircle Tim Geithner and all of the poisoned apples collected in his financial rescue basket.  What did he know and when did he know it or is he just a dupe of the bankers?  If all the banks are using or have used similar financial chicanery much less been allowed to carry toxic assets at inflated values, are any of the large banks not insolvent?




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Leftovers -- Radio Show 3/6/2010

 We emphasized the euro is here to stay and Greece is not going to default, but the EU austerity program includes tax increases, public job cuts, wage cuts, and lower pension payments to current retirees.  The problems in Greece cannot be solved until the mirror problems in Germany are solved: more internal demand and more productive labor wages.  The trade account competitiveness gaps between the southern Eurozone countries and the northern Eurozone countries are a direct result of the structure of the euro and even the primary author of the Stability and Growth Pact has publicly said it was not designed to be applied and create economic harm.

China's hidden debt may push government debt to 96% of GDP in 2011 or about $5.8 trillion, because surging local government borrowing is not counted in official estimates of China's debt to GDP.  China's banking regulator has begun an investigation and review of loans to local government's financing vehicles which were created as investment companies to circumvent regulations against local government direct borrowing.  This crackdown could create a wave of bad loans as projects are left without funding.  This debt could hamper China's ability to maintain growth and control inflation.


Kenneth Rogoff said China may be different, but that does not mean it will not have a financial crisis particularly since it is mired in debt and needs to spend to maintain growth.  The global financial crisis is still filtering its way through China, which is the world's largest economy, and China sees itself as standing alone in a hostile global environment.

A Deputy Governor of the Bank of China said his biggest fear for 2010 is the risks of the dollar carry trade, which China estimates at $1.5 trillion.  If the size of the Fed balance sheet is maintaining equilibrium in currency markets, which the 20 week correlation of .7 to .9 between the Fed balance sheet and value of the dollar appears to support, then any steps by the Fed to normalize rates or reduce its balance sheet (below $1.9-2.o trillion) too fast will tip the dollar into a deflationary rally.

US consumer credit in January went up $5 billion or 2.4% annualized.  It was expected to go down $4.5 billion but December was revised up $4.6 billion.  Credit card debt is down for 16th month in January, while auto and non-revolving debt is up $6.6 billion.

GM February sales up 11.5% vs year ago; Ford up 43.1% (and now has a 17% marketplace share); Toyota down 8.7%.

Pending home sales were down 7.6% in January.

US factory orders were up 1.7% in January (below 1.8 expected) propelled by aircraft sales which were up 118.6%; excluding transportation, orders were only up one-tenth percent.

10 Vanguard sector index funds, which were previously too concentrated for IRS favorable treatment, changed their MSCI benchmarks as did Fidelity previously.

On last Friday, Barney Frank agreed with the Administration that Fannie and Freddie debt should be backed by the US.  He said he supports the earlier Treasury statement that it stands fully behind their debt.  Earlier in the week Treasury testified before the financial investigatory commission that the US never guaranteed TBTF.

GM will reinstate 661 dealers of 1100 who sought arbitration over their terminations.

Stiglitz said the Fed structure is rife with conflicts of interest, because banks sit on the board of directors of each Fed district bank, which means the bankers are governing themselves.  He said that when he ran the World Bank he would have denied assistance to any country which created a central bank with the Fed's governance system.

FDIC will auction $38 billion of securities backed by residential mortgage assets of failed banks in 3 tranches managed by Barclays.

On 2/28, 1.2 million people lost unemployment benefits.  A temporary one month extension to April 5th was signed into law last week, but it does not effect those who have exhausted benefits or exhausted the final tier of extended benefits.  It only extends the deadline for one month allowing the opportunity to qualify for emergency unemployment compensation or extended benefits to continue.  The one month extension will cost $10 billion.

US consumer spending was up .5% in January; income was up .1% but disposable income was down .4%.

Construction (residential) spending was up 1.1% in January, but non-residential was down 1.4% for a total decline of .6%.  Residential is down 6.4% vs year ago and non-residential is down 19.9%.

ISM manufacturing index was down to 56.5 in February from 58.4; new orders were down 6.4 points' employment was up 2.8 points; inventory was up .8.

Outstanding bank credit fell $3.3 billion during the week of 2/17.  This is a 7 week cumulative decline of $150 billion.  Lending to households fell at 12% annualized over the lst 13 weeks.

Pension funds hold 68% of commercial real estate equity.

ISM service sector index was up to 53.0 (highest since 12/07) in February from 50.6; employment up to 48.6 from 44.6; prices paid down to 60.4 from 61.2.

US productivity Q4 up 6.5%; labor costs down 5.9%.  People are working harder for less.  Some economists are speculating that temporary and part-time employment may be coming permanent.

Fed President Rosengren (Boston) like Lockhart (Atlanta) favors keeping rates low and Rosengren said low interest rates were not "solely" to blame for the housing bubble.

Italy 2009 GDP contracted 5% and is estimating a positive .7% for 2010.  Unemployment was 8.6% in January.  The deficit is up to 5.3% of GDP from 2.7% a year ago.

Average wages in Germany for 2009 were down .4%.

French unemployment was up .5% to 10.0% in Q4.

German factory orders were up 4.3% in January (most since 6/07) with input prices up 6.9% (7.7% in January), but economists expect weak economy will not sustain inflation.

The Chinese Premier at their National Party Conference said they need to address the inequality of wages (urban-coastal vs rural) by boosting public welfare in rural areas, by maintaining easy monetary policies, and by holding the yuan steady to support economic recovery.

Bank of England held its interest rate at .5%; ECB held its rate to 1%.

16 country Eurozone Q4 GDP was .1% and contracted 2.7% vs year ago.

Australian central bank raised its interest rate 25 basis points to 4% (4th raise in 5 meeting - did not raise in last meeting).  Unemployment is 5.3% in January (5.8% in October).  Q3 GDP was up .3% and Q4 was up .9% for 2.4% 2009 and 2.7% vs year ago.  GDP is expected to grow 3.0% in 2010.  Public spending was up 3.8% in Q4.

Sweden fell back into recession with Q4 GDP down .6% and Q3 revised to <.1%> from up .2%.

Copper prices are up as the result of the earthquake in Chile.


HSBS profits were down unexpectedly to $7.1 billion in 2009 from $9.3 billion in 2008.  There was a $6.5 billion accounting loss on value of its debt (expected $5 billion loss).  It is paying 3 investment bankers over 9 million pounds each in mostly shares over 3 years.

China manufacturing (PMI) fell to 52.0 in February from 55.8.

AIG will sell its Asian life insurance subsidiary to UK's Pru for $35.5 billion.

Fed vice-chair Kohn (67 years old) is quitting at the end of his term in June.

Fed President Hoenig (Kansas City) said Fed should not be guaranteeing markets zero interest rate for extended period and should raise rates sooner than later but very gradually.  Plosser (Philadelphia) said the Fed must not lose regulatory powers and other bureaucracies are not needed.  He also want TBTF concept to end and be replaced with orderly bankruptcy process.  Fisher (Dallas) said let risky banks fail.  Bullard (St. Louis) wants Fed to treat QE in the same manner as adjusting interest rate policy.

US Treasury auctioned $272.17 million of Bank of America warrants and got in excess of $1.5 billion with A warrants fetching $8.35/warrant ($7 minimum) and B warrants selling for $2.55/warrant ($1.50 minimum).

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State/Local Governments: Dupes or Incompetent?

The impact of derivative swaps by state and local governments to insure against interest rate swings is again surfacing in this continuing Fed policy of zero interest rates (ZIRP).  The most recent story has been Los Angeles, which bought interest rate swaps from the Bank of New York Mellon to protect it from higher interest rates and in this zero interest Fed environment now finds itself paying the Bank of New York Mellon $10 million annually until either interest rates go up or until 2028.

The heart of the issue is were these governmental entities the victims of fraud or incompetent?  They were convinced by sales presentations to convert 10 year bonds that could be retired or restructured into 30 derivatives contracts which did not allow call or retirement, without penalty, if interest rates fell.  Some in the investment world have argued that it is buyer beware, although the governmental entities are often characterized as greedy, and, now, with lower interest rates they are whining.  Some commentators have focused on a New York Times writer who cannot grasp the different types of derivatives and swaps despite repeated criticism.  Was there a reliance upon the presentations of the securities brokers and investment bankers and were those presentations too optimistic and not forthcoming in the possible negatives?  In Italy, as we have previously reported, Bank of America has become the focus of a national fraud investigation with respect to its advice and sales of swaps to municipalities.  In Jefferson County, Alabama, the fraud was in the favorable placement of bonds and purchase of swaps with a securities broker.  In that case the former mayor of Birmingham took bribes and got 15 years in prison, the broker got only 52 months, and the broker's consultant-intermediary got 4 years in prison.  Notice the securities broker who wanted the business and made the bribe payments only got 52 months.  JP Morgan Chase, Bear Stearns, and Goldman Sachs paid the broker to secure the business.  While SEC fines have been paid the banks are demanding dismissal of fraud charges.  Several states have found themselves stuck with swaps, such as New York which paid $103 million to terminate $2 billion of swaps and still had $3.74 billion of swaps as of 11/30/2009.

Obvious, world-wide, governmental entities have been taken by fast talking investment salesmen.  As Felix salmon observes in this last link, interest rate swaps are sold rather than bought.  He points out that if the governmental entities had known enough to design the swap they wanted and asked for bids, there would have been less problems.  My experience is that governmental entities do not understand the counter party risks, the downsides, and the constraints and penalties, because they focus on the "savings" in the future of increasing interest rates.  In doing so, they fail to cost out the different scenarios and options before being sold.

We have discussed how auction rate securities were sold as liquid investments when, in fact, there was no guarantee by the issuing banks that the auctions would be held or the securities bought back if the market froze.  When the market did freeze, the cry of individual investors caused state and US regulators to force the banks to settle with these individual investors, but the governmental entities have had to fend for their selves.

Hawaii has lost $250 million in writedowns of $1 billion in auction rate securities bought from one securities broker, who had lobbied the Legislature to approve the investments, working for Citigroup.  While the State was limited to no more than 20% of auction rate securities to cash assets, the investments may have actually approached 29%.  Hawaii has rejected an unspecified offer from Citigroup to settle.  Maui County is suing Merrill Lynch over a similar investment.  There have been mixed judicial outcomes of governmental entities suing, because those which have tried to recoup 3 times the losses by alleging anti-trust violations have run afoul of SEC law and regulatory power over multiple participants preempting anti-trust law.  The proper way to proceed is to allege fraudulent, unfair, and misleading practices.

The same is true with respect to the interest rate swaps bought by governmental entities.  They should be repudiated and told to take the deceptive and misleading contracts back.  If they will not make a reasonable offer to settle, they should be sued for felony fraud.  However, one needs to be very careful in selecting an appropriately experienced attorney without conflicts of interest with the OTC dealer community.


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Credit Card Robbery

Both Karl Denninger of Market Ticker and Yves Smith of naked capitalist have commented on the new credit card user agreements that have been sent out in preparation for the new credit card law, which Citigroup wrote for the Administration, which has just recently taken effect.  We have previously commented on several areas which will bear watching and will undoubtedly have negative effects on consumers.  We commented on the radio show yesterday about the comments of Smith and Denninger, but it is serious enough that it deserves its own post rather than being lumped in with the Leftovers.

Using the JP Morgan Chase new user agreement as an example, both Smith and Denninger exposed the wording that would allow the bank to demand immediate and full payment of the credit card balance if they have any reason to "believe" the account holder may be unwilling or unable to pay as the result of "information" they may receive without regard to your account being current and no payments late or missed.  Universal default was to be illegal, but the banks have used legal language to circumvent the prohibition and make make a "maybe if" rather than a specific act reason for immediate and full payment.  This is not just a continuation of complex contract abuse; it is a direct threat to human liberty and due process.

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The Global Gambit vs. Regulatory Reform

In February, IMF managing director Dominique Strauss-Kahn at Davos, warned the US and European countries should not attempt financial regulatory reform nationally and urged governments pursue a multilateral, global approach.  His concern is that different national reforms will be inconsistent.    He is echoing concerns of international regulators and bank executives who do not want the "closely coordinated" efforts during the financial crisis in 2008-2009 giving why to concrete national initiatives providing reform regulation.  These are the same bankers who tell countries proposing regulatory reforms that banks will just move to other countries.

They are reacting to the proposed "Volcker" rules in the United States, which, as we have discussed previously, would actually leave the big banks as is while imposing a ban on proprietary trading.  The EU finance ministers publicly opposed this limitation on bank size and risk taking as inconsistent with the current European universal banking system.

Yet, when it is discovered that Greece, and other Eurozone countries, used legal currency swaps in 2002 to help hide debt, the EU wants to divert its attention from the real euro crisis to its current manifestation in the pan-European debt crisis to how international large banks made money legally but in a way which is fundamentally systemically dangerous.  Even while we have a demonstration of systemically dangerous investment banking by large international banks, a German economist has written that the re-instatement of Glass-Steagall type laws as the "Volcker" rules imply are unnecessary, because the US "... system of bank separation remained fairly intact up to the outbreak of the crisis."  He argues the US is actually trying to undo the Paulson-Geithner conversion of Goldman Sachs and Morgan Stanley into investment-commercial banks and reassert the legacy of separate commercial and investment banking which, in his opinion, made the crisis worse.  According to this German economist, the cavalier risk taking that led to the crisis was actually "...due to their inadequate capital reserves."

While the need for better capital reserves is obviously necessary, the German economist is actually arguing for a continuation of the current universal European banking system, which the separation of commercial and investment banking would directly challenge.  This raises the question of how systemically dangerous the universal European banking system is even if currently bureaucratic regulatory proposals are adopted and capital reserves increased.

The Baseline Scenario succinctly summed up the illusion of international governmental cooperation.  The WTO and the IMF have no authority and the EU Financial Stability Board is a "paper tiger".  The FSB is merely a forum for regulators and bankers to talk shop.  The big international banks have known this and use it to keep the process "international" and going no where meaningful.

Paul Volcker in a recent speech in Europe argued that commercial banks will become more like hedge funds unless limits on proprietary trading are not imposed.  He asserted that it is not in the public interest to have banks take deposits and use that money to engage in risky trading.  ECB President Jean-Claude Trichet, in defense of the current universal European banking system, expressed concern this would just push regulated activities into the unregulated hedge fund sector.

Who said hedge funds, and other shadow banks, should be left unregulated?

It all comes down to Joseph Stiglitz's early February opinion piece that differing opinions and priorities make global coordination difficult, if not a prescription for paralysis, which would only benefit the bankers. The only way to stimulate effective global cooperation is for individual nations to establish what they believe is a good regulatory structure for their nation.  This would force the bankers to fight multiple regulatory fires here and there and expose their attempts to prefer little regulation.  It is in the best interests of self-protection for each country to deal with its own regulatory needs and the leave the subterfuge of global intertwining behind to enable global regulatory coordination to be addressed later as self-protected countries seek coordination from positions of strength.

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Leftovers -- Radio Show 2/27/2010

Tyler Cowan and Felix Salmon both commented on Gary Gorton's new paper, "Questions and Answers about the Financial Crisis", with regard to the use of repos creating fragilities in the banking system.  Banks no longer just use deposits as funding sources.  The use of repos as funding sources creates a systemic risk, because the bond market depends on the denial of risk and when risk becomes questioned, the bond market comes to a grinding halt.  We should not try to guarantee repos as we guarantee deposits, but all systemic risks should be regulated and decisions made on how commercial banks function and investment/trading banks function.

China's banking regulator told commercial banks to restrict new lending to local governments and stop lending to those projects backed only by expected fiscal revenues.

China has performed some stress tests of potential yuan appreciation.  The tests which concentrated on the textile, shoe, garment, and toy exporters found that every percentage point of yuan appreciation would erode one percentage point of their profit.

While derivatives traders are still betting the euro will continue to slump, any speculation that the euro is doomed or will fade away is misplaced.  It is here to stay, although the EMU needs to restructure its trade and monetary policies, as well as how it applies the Stability and Growth Pact.

The Greek central bank governor said the Greek balance of payments gap is unsustainable.  As we have been saying, a crucial part of the current problem is the fixed trade exchange rates between the Eurozone countries, which create competitiveness gaps.  The Greek central bank governor said, "The balance of payments deficit is not sustainable. A policy mix which will bring back the macroeconomic and microeconomic imbalance and improve the economy's competitiveness and productivity is needed to restore sustainability."

The economist, Carlo Bastasin, has written that the IMF cannot help Greece, because it is less able to address the problem of restoring equilibrium  in the current account balances within the Eurozone.  The Greek fiscal deficit and the loss of competitiveness are connected, because a current account deficit (imports over exports) will make it more difficult for the Greek government to raise taxes to cover the public deficit.  "...If Greece's growth prospects are more limited, its existing debt burden is more onerous."  To avoid this, the domestic demand of Greece's trade partners needs to increase.  "In other words, the Greek problem is the mirror image of the 'hidden' German problem", which needs to increase domestic demand and lower labor costs.  You cannot solve the Greek imbalances without correcting the German imbalances.

The role of large banks and hedge funds in threatening the survival of Greece and the value of the euro in order to make short term derivative trading profits is drawing the attention of other European countries and there is a growing consensus that regulatory action may be necessary as the credit default swaps are increasing systemic risk. 

The ECB refuses to release information as to how many Greek bonds are on its balance sheet as the results of its repo operations.  It is speculated that many of the Greek bonds, of which there are approximately 270 billion euro total, which were held by European banks are now in the possession of the ECB and 37 billion held by Greek banks.

After the EU commission visit, the Greek prime minister said that the worst fears of the Greek economy had been confirmed and the Greece would miss its deficit reduction efforts if it did not carry out more spending cuts which have already sparked demonstrations.  The EU commission indicated that Greece may be able to cut its deficit by 2% rather than the 4% goal. There is increased antipathy between Germany and Greece, which will hinder Greece's ability to obtain EU support for its deficit reduction program.

Portugal has said it is under no pressure to speed up bond sales as 20% of its financing needs have been met for the year.  Portuguese bonds are the worst performing in the region.

The Bank of Spain is considering raising the minimum amount banks must hold in provisions of potential losses in property assets.  Many experts believe Spanish banks will face a new housing crisis in the coming months.  They may have to absorb between 100,000 and 150,000 homes immersed in foreclosure cases.

The Irish government is being forced by the EU to take a 15.7% stake in the Bank of Ireland PLC in lieu of a 250 million euro cash dividend due the government despite the need to contain government deficits.  The government holds 25% preference shares in both the Bank of Ireland PLC and Allied Irish Banks.

Italy has the second largest debt and is considered to the economy of the Eurozone according to the economist Robert Mundell, who won the Nobel prize in 1999 for research which lead to the creation of the euro.  Italy's economy contracted .2% in Q4 and risks falling back into recession.  It has 1.8 trillion euro in debt, which is five times that of Greece and one-quarter of the Eurozone debt.

US Treasury auctions: 
30 year TIPS, $8 billion, yield 2.229%, bid-to-cover 3.33, foreign 42.4%, direct 15.1 in what was seen as a weak, soft demand.
2 year Treasury, $44 billion, yield .895%, bid-to-cover 3.33, foreign 53.6% (high) and 100% filled, direct 8.2%.
5 year Treasury, $42 billion, yield 2.395, bid-to-cover 2.75, foreign 40.3%, direct 12.8%.
7 year Treasury, $32 billion, yield 3.078%, bid-to-cover 2.98%, foreign 40.3%, direct 17.2%.



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Argentina, Oh, Argentina: Playing With Fire

While the world watches Greece, Argentina is burning.  Because both countries have debt problems and endemic private and public corruption, some commentators have tried to draw parallels between the two.  In fact they are two very different situations.  In 2002, Argentina defaulted on $95 billion of debt internationally.  Greece is not in jeopardy of default and will not default.  While both countries are still emerging from dictatorship, the level of private (including tax evasion), public, and political corruption is far more invasive in Argentina with its peronista culture.  While Greece has a competitiveness problem within the Eurozone as the result of fixed trade exchange rates, the euro is not a pegged currency.  The Argentine peso maintained a fixed peg with the US dollar for 11 years until 2002 which increased its dependence on US dollars and foreign debt leading to the 2002 default.  Beginning in 2002 with the rescinding of the currency peg, inflation broke out and has continued to the present as a virtual way of life and may approach 20% this year.

In 2001, de la Rua resigned the presidency and Duhalde, an economically center left Peronist, became interim president with unemployment at 25% and capital fleeing the country.  Despite intense social protests, the country used the currency devaluation to re-industrialize, increase internal demand and exports leading to fiscal and trade surpluses.  In 2003, Kirchner, a social democratic Peronist, was elected president and Argentina paid off its IMF loans, restructured its defaulted debt at a 66% discount, renegotiated utility contracts, began nationalizing privatized businesses, applied price controls, and engaged in a sweeping public works investment program.  Kirchner's approach to inflation was to remove those in charge of studying and issuing inflation statistics with his own people; consequently, "official" inflation statistics are less than one-half of reality.  In 2007, Kirchner "stepped" aside to let his wife run and be elected president and she has continued his policies, which aggravate and continue the inflation.  In 2009, the Kirchner's political party lost control of the Argentine Senate, which is leading to a potential political confrontation.  The emergence of major bribery and corruption scandals from Nestor Kirchner's administration are continuing and will not die away.

In 2008, Fernandez de Kirchner had a law passed allowing the government to seize all private pension funds allowing the government to invest the pension funds in government bonds, which were used to make international debt payments.  If Argentina is going to be able to borrow internationally, it must continue to repay its re-structured default debt.  Despite the Argentine central bank being a political extension of the government, Fernandez de Kirchner fired its president Redrado, when he refused to transfer central bank foreign currency reserves to the Treasury, and replaced him with a political ally, Mercedes Marco del Pont, who will guide the central bank consistent with the economic policies of the government and who transferred $4.2 billion to the Treasury without the necessary legislative approval.  These foreign currency reserves will be used to pay international debt.

The transportation monopolies, which accept only coins, are so corrupt that the country as a whole has a shortage of coins as these companies hoard the coins and charge exorbitant fees for paper currency exchanges.  Regular businesses and individuals would rather give excess change in paper currency than part with a coin.  Beef prices, as the result of production and export taxes (which effect supply) as well as inflation, are up 25% in this beef eating country.  Argentina's budget deficit to GDP will double this and the country faces an inflation-wage price spiral as Fernandez de Kirchner aggressively seeks to appropriate money from whatever sources to pay international debt and continue an aggressive public works program in defiance of Argentina's Congress.

Is Argentina so systematically corrupt that its citizenry cannot demand a free society and have grown to expect the choices to be one type of corruption or another?  At what point does this out of control inflation, which has been accompanied by growth, become socially intolerable?  Is the massive public works program keeping enough people employed and fueling enough future growth?  Will increased political confrontation require public diversions?  Oil has been discovered in the Falkland Islands (Malvinas) and Argentina and the United Kingdom are butting heads.  Both countries have economic difficulties, with Greece debt problems focusing a lot of analytical attention on the United Kingdom, and both could politically benefit internally from an international confrontation involving sovereignty and oil.  Posturing rather than actual military confrontation is the most likely scenario, particularly since Argentina has cut military spending by 50%.  Argentina has gone to the UN and the United States is not supporting the United Kingdom.  The United States Supreme Court also allowed Argentina private pension money in the United States to be turned over to Argentina.  While trying to mitigate Venezuela's, and its allies Iran and Russia, influence as well as China, the United States may be playing into their hands if the UK redeploys troops from Afghanistan to the Falklands in a demonstration of strength that could bolster Gordon Brown.  The current situation could strengthen the Rio Group at the expense of the Organization of American States as well as the commercial-strategic position of China, Russia, and Iran in Central and South America.

Argentina's central bank has consistently failed to promote price stability and monetary policy and has been unable or unwilling to divorce itself from fiscal policy.  It is a perfect example of the failure of a corrupt central banking system tied to a corrupt political system.  Unfortunately, Argentina's inflation problem has geopolitical consequences.

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