Month: January 2016

As extensively discussed yesterday in the aftermath of the BOJ’s stunning decision to cut rates to negative for the first time in history (a decision which it appears was taken due to Davos peer pressure, a desire to prop up stock markets and to punish Yen longs, and an inability to further boost QE), there will be consequences – some good, mostly bad.

As Goldman’s Naohiko Baba previously explained, NIRP in Japan will not actually boost the economy: “we do have concerns about the policy transmission channel. Policy Board Member Koji Ishida, who voted against the new measures, said that “a further decline in JGB yields would not have significantly positive effects on economy activity.” We concur with this sentiment, particularly for capex. The key determinants of capex in Japan are the expected growth rate and uncertainty about the future as seen by corporate management according to our analysis, while the impact of real long-term rates has weakened markedly in recent years.”

What the BOJ’s NIRP will do, is result in a one-time spike in risk assets, something global stock and bond markets have already experienced, and a brief decline in the Yen, one which traders can’t wait to fade as Citi FX’s Brent Donnelly explained yesterday.

NIRP will also have at most two other “positive” consequences, which according to Deutsche Bank include 1) reinforcing financial institutions’ decisions to grant new loans and invest in securities (if only in theory bnecause as explained further below in practice this may very well backfire); and 2) widening interest rate differentials to weaken JPY exchange rates, which in turn support companies’ JPY-based sales and profit, for whom a half of consolidated sales are from overseas.

That covers the positive. The NIRP negatives are far more troubling. The first one we already noted yesterday, when Goldman speculated that launching NIRP could mean that further QE is all tapped out:

… we believe the BOJ thinks that JGB purchases will have reached their technical limit in quantitative terms eventually, and it is highly likely it was a last-ditch measure to somehow maintain the current pace of purchases for some time. If not, we would have expected the BOJ not to introduce a negative interest rate this time either and to have opted instead to further increase JGB purchases.

Today, Deutsche Bank’s Japan analyst Mikihiro Matsuoka jumps on the bandwagon and adds that “we are worried about a possible opening of a Pandora’s Box by explicitly removing the lower bound of nominal interest rates.“

Here, according to Deutsche, are the most severe consequences of Japan opening the NIRP Pandora’s box :

1. as the monetary base target of expanding by JPY80trn a year continues, the tax on financial institutions expands rapidly also, even if an upper bound on excess reserves that are subject to the negative rate is set. The net interest margin of Japanese commercial banks is lower than in other countries.
2. it is unlikely to deliver a combination of the reduction in excess reserves and a rise in lending on private financial institutions’ balance sheets: financial institutions cannot avoid this tax. If they intend to shift reserves to loans and holding securities in order to avoid the tax from the negative interest rate, excess reserves (a part of the monetary base) should fall, which the BoJ would not accept. As long as the target for monetary base expansion is maintained, the mostly likely outcome would be increases in both excess reserves and bank loans (or the holding of securities). On the other hand, in order for the monetary base to continue to expand, there have to exist sellers of government securities to the BoJ. A downward shift of the yield curve could cause financial institutions to refrain from selling government securities with higher associated capital gains to the BoJ.
3. the negative interest rate is, in effect, a tax on financial assets, and not the BoJ’s intention. This could lead to an opposite outcome to that of the initial intention, whereby the country encourages companies and households to engage in capital outflow.

It is that last bullet point which is most important because it leads us to the most disturbing topic of all for Japan – the risk that NIRP backfires and leads to another “China”, where the local citizens rush to park their assets offshore, resulting in a slow at first then rapidly accelerating capital outflow. This is how DB explains it:

if the negative interest rate continues for longer or goes deeper, commercial banks may have to set negative interest rates on deposits, which would expand not only the tax on commercial banks, but also on depositors (households and companies). This could lead to a ‘silent bank run’ via a shift of deposits to cash (banknotes), which in turn damages the sound banking system by enlarging the leakage of funds from the credit creation mechanism in the banking system.

That, and the capital outflow noted above. The good news is that Japan has a lot of physical banknotes to allow the NIRP bank run to continue for quite a while before collapsing the financial system.

In short, to grasp the worst possible consequence of Japan’s panicked response to a rising Yen and plunging Nikkei look no further than China’s unprecedented capital control attempts to stem the monetary outflow.

And if that wasn’t cheerful enough, here is DB’s conclusion which confirms that just a month after the Fed made a policy mistake, it is Japan’s turn to follow in Yellen’s shoes:

We wonder whether removing the last breakwater of the lower bound at a zero interest rate could end up being an expensive choice in the long run. The factor which pushed the BoJ down this path is probably its view that causality runs from economic activity to wages and then to prices, which we do not agree with. Our view is that causality runs from economic activity to prices and then to wages, and we do not share the argument that inflation does not rise because wages have not risen.

 

We believe the additional room that the BoJ has to lower rates on bank reserves is smaller than in other countries that have already introduced a negative interest rate, because of the lower net interest margin of commercial banks in Japan. However, if the BoJ pursues this path, we could reach the point of the trade-off of possibly damaging the soundness of the banking system.

By then, however, a Davos peer-pressured Kuroda will be long gone, and the doomed attempt to keep the system together will be someone else’s problem. For now, all that matters is that stocks bounced… if only for a very brief period of time.

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Earlier this week, Malaysia’s top prosecutor Attorney General Mohamed Apandi Ali cleared PM Najib Razak of any wrongdoing in connection with some $681 million that landed in his bank account back in 2013.

The money was “a personal donation” from the Saudis, the investigation found and no further information was necessary. That, we said, was unlikely to satisfy critics.

Critics like former PM Mahathir Mohamad, the “founding father” of modern Malaysia who has a series of questions about the alleged “donation” including the following:

• “It seems there was a letter by a Saudi stating that a sum of US$681 million or RM2.08 billion was a donation for the PM’s contribution to the fight against Islamic terrorists. Who is this Arab?”
• “How does he have the huge sum of money to give away?”
• “What is his business?”
• “What is his bank?”
• “How was the money transferred?”
• “What documents prove these?”
• “Just a letter from a deceased person or some non-entity is enough for the A-G?”

All good questions and questions that we suggested will likely never be answered. 

As a reminder, all of this stems from multiple investigations into 1MDB, Malaysia’s controversial development fund that many say functions as a slush fund for the PM and other corrupt politicians. 

1MDB was set up by Najib in 2009 and owes some $11 billion thanks in no small part to a series of bond deals arranged by Goldman banker Tim Leissner, whose wife Kimora Lee is close friends with Najib’s wife Rosmah Manso. Those deals were quite lucrative for Goldman. Leissner effectively bought the bonds for the bank’s own books at 90 cents on the dollar. That discount amounted to a hefty underwriting fee. 

This week, we learned that Leissner is taking a “personal leave” and will relocate from Singapore (through which the “donation” from the Saudis flowed) to Los Angeles. 

In the latest news out of the 1MDB saga, “Switzerland’s chief prosecutor said on Friday a criminal investigation into state fund 1Malaysia Development Berhad (1MDB) had revealed that about $4 billion appeared to have been misappropriated from Malaysian state companies,” Reuters reports.

The Swiss have been poking around 1MDB for months. Back in August of 2015, Swiss authorities started looking into the state entity for suspected corruption of public foreign officials, dishonest management of public interests and money laundering.

“The office of Swiss Attorney General Michael Lauber said it had formally asked Malaysia to help with its probes into possible violations of Swiss laws related to bribery of foreign officials, misconduct in public office, money laundering and criminal mismanagement at the fund,” Reuters goes on to note, adding that “Lauber’s office said a small portion of the apparently misappropriated money had been transferred to accounts held in Switzerland by former Malaysian public officials and current and former public officials from the United Arab Emirates.”

That’s not surprising. Recall that there’s a convoluted series of transactions at issue with 1MDB including disputed collateral payments to a subsidiary of an Abu Dhabi sovereign wealth fund and an opaque relationship with PetroSaudi, an oil venture run by a Saudi prince.

“The four cases of suspected criminal conduct related to former 1MDB subsidiary SRC International, Petrosaudi, Genting/Tanjong and ADMIC between 2009 and 2013, it said,” Reuters adds.

“The criminal investigation conducted by the Attorney General found serious evidence of embezzlement to the detriment of companies in the Malaysian state,” a statement from the Swiss AG’s office reads. “The amount of the allegedly misappropriated funds amounted to approximately $ 4 billion, whose purpose is the subject of further study.”

Yes, the “purpose” of the $4 billion that apparently ended up in several Swiss bank accounts is “the purpose of further study,” and you can be sure that the Najib government isn’t likely to be especially helpful despite AG Apandi’s contention that Malaysia is “keen to establish all the facts about 1MDB.”

Recall that the Swiss proceedings are in connection with an investigation into “persons unknown.” 

Those “persons” weren’t named on Friday but we’ll be interested to discover whether any of the accused work for the world’s most influential financial institution and more importantly, which Malaysian authorities skimmed $4 billion from an entity designed to benefit the Malaysian public.

*  *  *

Full statement from Swiss AG office

As part of the proceedings initiated on 14 August 2015 criminal proceedings against two former directors and officers of the Malaysian sovereign wealth fund 1MDB (1Malaysia Development Berhad) and Unknown for bribery of foreign public officials (Art. 322septies Criminal Code), unfaithful administration (Article 314 of the Criminal Code.) , money laundering (Art. 305 bis of the Criminal Code) and unfaithful agency (Art. 158 of the Criminal Code) has asked the Malaysian authorities niches for mutual legal assistance the federal prosecutor. The cooperation of these two countries has already been discussed at the meeting in Zurich on 15 September 2015 between the Federal Public Prosecutor of Switzerland and the Malaysian Attorney General. Letters rogatory is now a concretization of the agreement in principle taken within the framework of this meeting.

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Submitted by Justin Raimondo via AntiWar.com,

I haven’t had this much fun in years – of course I’m talking about the US presidential election season, with The Donald taking on all comers, and winning (at least so far), and Bernie Sanders burning up the self-satisfied mandarins of the Democratic party Establishment.

What’s great about this spectacle – and one must view it as a spectacle in order to gain maximum enjoyment from it – is that, as none other than Rush Limbaugh points out:

“Trump is so far outside the formula that has been established for American politics that people who are inside the formula can’t comprehend it. They don’t understand why somebody would want to venture so far outside it, because it is what it is, and there’s a ladder of success that you have to climb. And somebody challenging it like this in more ways than one, as Trump is doing, has just got everybody experiencing every kind of emotion you can: They’re angry, they are flabbergasted, they’re shocked, they’re stunned – and all of it because he’s leading.”

As I explained here, and here, one of the ways Trump is upending the rules is that he’s broken with the GOP mandarins on foreign policy. Yes, yes, I know he bloviates about how he’s “the most militaristic person” on God’s green earth, but the fact is there’s plenty of others out there who out-do him in that category. I’ve heard him say he wants to “bomb the s**t out of ISIS,” but aren’t we doing that already – to little effect? When Bill O’Reilly asked him why he didn’t support putting ground troops in Syria, he answered “Do you want to run Syria?” O’Reilly demurred. Trump puffs up his chest and announces he wants us to have “the strongest biggest baddest military on earth” – but you’ll note he invariably adds: “So we’ll never have to use it.”

Most significantly, he doesn’t want to start World War III with Vladimir Putin’s Russia: he’s actually defied the anti-Russian propaganda blitz and said he’d like to be able to get along with Putin. This alone would’ve been enough for the neocons to start a holy war against him, but he’s even gone further than that and said the Iraq war – the neocons’ handiwork – was “one of the dumbest things ever,” and Limbaugh describes their response to a tee (of course without naming them).

Oh yes, it’s great fun watching the waterboarding of the neocons, because they count among their enemies the top two contenders for the Republican nomination, not only Trump but also Ted Cruz. The greasy-haired Canadian earned their ire when he attacked them by name, but as Rosie Gray reports in Buzzfeed they may be reconciling themselves to Cruz because he’s the only viable Not-Trump:

“Some of the hawkish figures who Ted Cruz recently dismissed as ‘crazy neo-con invade-every-country-on-earth and send our kids to die in the Middle East’ … say they’d consider supporting Cruz anyway if he’s the last man between Donald Trump and the Republican presidential nomination.

 

“Cruz, it turns out, hasn’t fully burned his bridges with that set of advisers and supporters of George W. Bush – figures like Weekly Standard editor Bill Kristol and former National Security Council official Elliott Abrams, who aren’t closed off to Cruz, especially in the case of Abrams. Indeed, despite some lingering resentment and suspicion, there are even glimmers of rapprochement as the Republican primary looks like it could become a two-man race. ‘I would not hesitate to back Cruz as the nominee,’ Abrams – who not long ago told National Review that Cruz’s use of the word neocon invoked ‘warmongering Jewish advisers’ – told BuzzFeed News.”

Cruz, for his part, is more than willing to smoke a peace pipe with the War Party:

“In an interview on his campaign bus in Iowa last week, Cruz told BuzzFeed News that, despite his jabs at neocons, he has ‘good relations with a great many foreign policy thinkers.’ Cruz has in the past cited Abrams along with former U.S. Ambassador to the U.N. John Bolton and former CIA director James Woolsey as trusted foreign policy experts.”

It’s getting pretty cozy in that campaign bus. Rosie, who knows a thing or two about neocons, seems to be the designated ambassador from Kristol-land to the Cruz campaign, and as the Anti-Trump Popular Front – the widest coalition in the history of politics, stretching all the way from the New York Times to Charles Krauthammer – tries to sell us on the idea that the Establishment is now backing Trump against the “insurgent” Cruz, she provides some insightful analysis of just who is the Real Establishment:

“The neocons’ willingness to consider Cruz stands in sharp contrast with a new line of current conventional wisdom in Washington that Cruz, who is the object of particularly intense personal dislike from establishment Republicans, is actually less acceptable to the establishment than Trump.”

We know who is the Establishment: it’s those brilliant folks who brought us the Iraq war, who want us to repeat our mistake in Syria, and who pine for a US-led regime-change operation in Russia to get rid of Putin and install a pliable Yeltsin-substitute in power. The Establishment, in short, is the War Party, otherwise known as the neoconservatives, and they are the tireless enemies of peace and liberty. Until and unless they are destroyed as a viable political force, either in the GOP or outside it, there will be no peace in this world. If and when Trump succeeds in sidelining them, that alone will be worth whatever price we have to pay in the – unlikely – event he makes it to the White House.

As even the usually clueless Ben Domenech, over at The Federalist, observes:

“On foreign policy, Donald Trump is exploiting American frustration with the elites of both parties. He cites over and over again his opposition to the war in Iraq as a smackdown for the neoconservative views which have ruled the roost in Republican foreign policy circles for 15 years. But he also uses his opposition to engagement in Libya to smack Barack Obama, Hillary Clinton, and Marco Rubio.

 

“It is very telling that the two leading candidates in the GOP primary today are very critical of intervention in Iraq and Libya and Syria, and this has not only not hurt them, but potentially helped them reach more than 50 percent support in the polls. One would think Republican elites would recognize this and think about what it means about the views of their base. One would think, but one would be wrong.”

With the triumph of Trumpismo having demolished the GOP foreign policy consensus – and the neocons’ ideological and organizational stranglehold on the conservative movement – the way will be cleared for a libertarian-ish insurgency to arise out of the rubble and make some real headway. I realize it’s hard to see this at the present moment: just like on HGTV, when some clueless couple on “Fixer Upper” or “Property Brothers” just can’t see that the scary dilapidated wreck of a house they’re being shown could become their Dream Home. Yet, in the end, they are bowled over by the luxurious and stunning result.

(Of course, there are no guarantees in life: a lot depends on if the fractious libertarians, beset as they are by right-wing opportunism and a brainless form of anti-political sectarianism, can finally get their act together.)

On the other side of the aisle – that is, in the Democratic party – a similar drama, with some significant variations, is being played out in the race pitting Bernie Sanders against Hillary Clinton. The latter is widely considered the presumptive heir, much like Jeb Bush was assumed to be the GOP frontrunner on account of his last name. Yet Bush has been humiliated and sidelined, and Mrs. Clinton may well be in danger of sharing his fate: Sanders is beating her in New Hampshire as well as in Iowa. This has “centrist” Michael Bloomberg, former New York City mayor and professional scold, so upset that he is threatening to launch a third party run if Sanders gets the nod.

The beleaguered Mrs. Clinton doesn’t have major principled differences with Sanders when it comes to domestic policy: their disagreements are over strategy, not goals. The real split is over foreign policy, with Hillary the hawk pecking at Sanders over his relatively dovish stances on issues from Iran to Libya. And now a posse of “national security” bureaucrats has taken out after Sanders with a joint statement deploring his unwillingness to parrot the War Party’s line:

“Over the past four debates, the subject of ISIS and Iran have come up a number of times. These are complex and challenging times, and we need a Commander in Chief who knows how to protect America and our allies and advance our interests and values around the world. The stakes are high. And we are concerned that Senator Sanders has not thought through these crucial national security issues that can have profound consequences for our security.

 

“His lack of a strategy for defeating ISIS – one of the greatest challenges we face today – is troubling. And the limited things he has said on ISIS are also troubling.

 

“For example, his call for more Iranian troops in Syria is dangerous and misguided and the opposite of what is needed. Supporting Iranian soldiers on Israel’s doorstep is a grave mistake. And while we support de-escalation of Sunni-Shia tensions, his argument that Iran and Saudi Arabia – two intense adversaries – should join together in a military coalition is just puzzling. Indeed, the Iranian government recently failed to stop protesters from ransacking and burning the Saudi embassy in Tehran, after which Saudi Arabia cut off diplomatic ties with Iran.

 

“We are all strong supporters of the nuclear diplomacy with Iran. Some of us were part of developing the policy that produced the diplomacy over the past several years. And we believe that there are areas for further cooperation under the right circumstances. But Senator Sanders’ call to ‘move aggressively’ to normalize relations with Iran – to develop a ‘warm’ relationship – breaks with President Obama, is out of step with the sober and responsible diplomatic approach that has been working for the United States, and if pursued would fail while causing consternation among our allies and partners.

 

“Given these concerns, it is important to ask what he would do on other issues – on Russia, China, our allies, nuclear proliferation, and so much else. We look forward to hearing him address these issues.

 

“We need a Commander in Chief who sees how all of these dynamics fit together – someone who sees the whole chessboard, as Hillary Clinton does.”

The only time the Clintonistas want to “move aggressively” is when it involves invading a sovereign nation like Iraq, Libya and Syria, and turning it into a cauldron of Islamist terror. Her “strategy” for defeating ISIS is to set up “no fly zones” in Syria, reoccupy Iraq, and fund the very head-chopping Syrian “rebels” from which ISIS and Al-Qaeda have sprung and with whom they are ideologically aligned. Indeed, Mrs. Clinton, who spearheaded the movement inside the US government to arm the Islamists in Syria and Libya, deserves the title “Mother of ISIS.”

As for all the balderdash about Iran: this is clearly the Israel lobby talking, and if there was any confusion about Mrs. Clinton’s role as their champion in the Democratic party, this should clear it up.

Yet the Clintonian arguments for an anti-Iranian foreign policy are not very convincing. For just one example: If “supporting Iranian soldiers at Israel’s doorstep is a grave mistake” then is Israel supporting ISIS at their own doorstep an equally grave miscalculation? But of course you won’t be hearing any criticism like that coming from this crowd.

From a noninterventionist perspective, neither Sanders nor Trump is perfect – both are very far from that. But to nitpick over their deviations is to entirely miss the point, as sectarians of both the left and right are bound to do. These two candidates represent, each in their own way, powerful and growing tendencies on both sides of the ideological spectrum that the movement for peace can utilize to its own advantage. For we cannot change the world until and unless we begin to understand it: only then can we take advantage of such openings as it allows. What is happening in this country is a rebellion against both wings of the War Party – and that is something to be celebrated and encouraged, even as we critique its shortcoming and urge the rebels to take their insurgency further.

Insofar as this election season is concerned, the watchwords or slogans that give voice to the “correct” position are best expressed in terms of double-negatives. For the conservative Republican readers, that would be: anti-anti-Trump. For the progressive Democrats: anti-anti-Sanders.

We are hearing the voices of the Mushy Moderate Middle rise up in defense of the status quo: Democrats like the Washington courtier Dana Milbank are warning us against Sanders, while the neocons to a man are railing against the Trumpist Temptation. This should be enough to tell us what is the right road to take and what our answer to the Mushy Middletarians must be: Extremism in defense of peace is no vice – and moderation in the fight against the War Party is no virtue!

via Zero Hedge http://ift.tt/1PGcumV Tyler Durden

Perhaps the most peculiar thing about Islamic State is that despite continual reports of highly successful airstrikes and proclamations from various governments regarding the extent to which the group’s operational capacity has been severely diminished, they never seem to go away.

In fact, besides the recent declaration from the group’s leadership that fighters’ salaries will be cut by 50% due to “exceptional circumstances,” we really haven’t seen any concrete evidence to support the contention that “the terrorists” (as Sergei Lavrov matter-of-factly calls them) are on their last legs.

Ramadi was retaken by the Iraqi army but the real prize is Mosul and ISIS remains just as entrenched there as they ever were. The group recently launched a serious offensive in Libya, where the country’s oil infrastructure is under attack. And no one is any closer to liberating Raqqa, the de facto ISIS capital.

Sure, Russia has released hundreds of videos depicting what The Kremlin says are airstrikes against training centers, stongholds, and, most notably, oil tankers but at the end of the day, al-Hayat Media Center continues to churn out the propaganda and the group fights on, seemingly no worse for wear.

One person who isn’t convinced that the group’s capabilities have been curtailed is Vice-Adml Clive Johnstone, a senior NATO Naval officer.

Clive is especially concerned about Islamic State’s maritime “ambitions.” ISIS, he figures, wants to build a navy. “The march of Islamic State in Iraq and Levant (Isil) along the Libyan coast has cast an ‘uncomfortable shadow’ across shipping,” The Telegraph writes, quoting Johnstone.

“We know they have had ambitions to go off shore, we know they would like to have a maritime arm,” the Admiral continues.

Back to that in a moment after a brief trip down hypocrisy lane.

Johnstone says he’s worried about “sophisticated Chinese and Russian” weapons falling into the hands of militant groups like Hezbollah. Those weapons, he says, create a “horrible opportunity” that a “misdirected, untargeted round of a very high quality weapons system will just happen to target a cruise liner, or an oil platform, or a container ship.”

Johnstone apparently isn’t concerned that “sophisticated” American weapons might be used for similar attacks.

After all, the US is arming all sorts of Sunni extremists in Syria and one group (the FSA) has already done exactly what Johnstone claims to be so afraid of: they used a US-supplied TOW to destroy a Russian search and rescue helicopter (see here for more).

The other hypocritical thing to note about Johnstone’s assessment is that it was NATO itself that put Libya in the position it’s in now. Had NATO not supported the overthrow of Gaddafi, we wouldn’t be in this situation in the first place and ISIS wouldn’t be running amok in the country’s oil crescent. 

Johnstone goes on to describe what type of attack he imagines might be coming in the Mediterranean.

“I think it won’t be a planned, horrible mischievous act, I think it will be an act which is almost a mistake, or it will be an act of random terrorism that will suddenly have extraordinary implications for the Western world,” he says.

Got that? It will either be some kind of unplanned, “almost” accident that isn’t “horrible” or it will be an earth-shattering, murderous, “random” act of terrorism. It seems pretty clear from that convoluted bit of nonsense that Johnstone has no idea what he’s talking about.

But that’s ok, because the Admiral’s point isn’t to provide any intelligence about a credible threat to a cruise liner. No, his point is to explain why NATO needs to send more ships to the Mediterranean. And because it’s not polite to say “we need to have a stepped up presence because the Russians are there,” he’ll claim extra maritime muscle is necessary because ISIS is building a navy. Here’s The Telegraph again:

The Nato allies must also not allow themselves to be “hustled out” of the eastern Mediterranean, where the Russian Navy is increasingly active, he said.

 

He said the growing risks to shipping in the Mediterranean mean he is “quietly worried” there will be an attack or serious incident.

Got it. So NATO needs more warships in the region because ISIS may be planning a “serious” maritime “incident.” Just like how the US needs to have troops in Syria because of ISIS. And just like Turkish President Recep Tayyip Erdogan needs to consolidate power so he can combat the ISIS threat. And just like Russia needs to support Bashar al-Assad in order to keep ISIS from taking Damascus. 

Now that you mention it, you can pretty much justify anything these days by claiming you’re fighting ISIS. Maybe that’s why they’ve stuck around so long. If world powers eliminate them, how will everyone explain their warmongering?

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Student Loan Debt is a cancer for our society. This misconception that getting a college education equals a steady career has been dashed by the recession. For-profit colleges pray on undereducated and low-income individuals. Text book prices have risen exponentially while the cost of a quality education has as well.

 

Source: DailyInfographic.com

This industry of education is going backwards, and will one day burst – will that happen soon?

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Two weeks ago, Zero Hedge reported an exclusive story corroborated by at least two independent sources, in which we informed our readers that members of the Dallas Federal Reserve had met with bank lenders with distressed loan exposure to the US oil and gas sector and, after parsing through the complete bank books, had advised banks to i) not urge creditor counterparties into default, ii) urge asset sales instead, and iii) ultimately suspend mark to market in various instances.

The Dallas Fed took the opportunity to respond (on Twitter), when in a tersely worded statement it said the following:

No truth to this @zerohedge story. The Dallas Fed does not issue such guidance to banks. https://t.co/rmE3Zul3PM

— Dallas Fed (@DallasFed) January 18, 2016

We thanked the Fed for answering even if its response was in itself a lie, and further since we fully stood by our story, we asked the Federal Reserve chaired by Goldman Sachs veteran, Robert Kaplan, to answer several follow up questions regarding this matter which is of significant public interest.  To wit:

• Has the Dallas Fed, or any other members and individuals of the Federal Reserve System, met with U.S. bank and other lender management teams in recent weeks/months and if so what was the purpose of such meetings?
• Has the Dallas Fed, or any other members and individuals of the Federal Reserve System, requested that banks and other lenders present their internal energy loan books and loan marks for Fed inspection in recent weeks/months?
• Has the Dallas Fed, or any other members and individuals of the Federal Reserve System, discussed options facing financial lenders, and other creditors, who have distressed credit exposure including but not limited to:
  • avoiding defaults on distressed debtor counterparties?
  • encouraging asset sales for distressed debtor counterparties?
  • advising banks to avoid the proper marking of loan exposure to market?
  • advising banks to mark loan exposure to a model framework, one created either by the creditors themselves or one presented by members of the Federal Reserve network?
  • avoiding the presentation of public filings with loan exposure marked to market values of counterparty debt?
• Was the Dallas Fed, or any other members and individuals of the Federal Reserve System, consulted before the January 15, 2016 Citigroup Q4 earnings call during which the bank refused to disclose to the public the full extent of its reserves related to its oil and gas loan exposure, as quoted from CFO John Gerspach:

  “while we are taking what we believe to be the appropriate reserves for that, I’m just not prepared to give you a specific number right now as far as the amount of reserves that we have on that particular book of business. That’s just not something that we’ve traditionally done in the past.”

• Furthermore, if the Dallas Fed, or any other members and individuals of the Federal Reserve system, were not consulted when Citigroup made the decision to withhold such relevant information on potential energy loan losses, does the Federal Reserve System believe that Citigroup is in compliance with its public disclosure requirements by withholding such information from its shareholders and the public?
• If the Dallas Fed does not issue “such” guidance to banks, then what precisely guidance does the Dallas Fed issue to banks?

We assumed (correctly) there would be no Twitter, or any other unofficial response to this list of questions, which is why two weeks ago we, in collaboration with several readers (due to obvious reverse FOIA purposes), also requested an official response from the Fed through a Freedom Of Information Act submission. Surely if the Fed would go so far as to call us liars, it would have no problem either responding or providing the required information.

This is what we got back.

We appreciate the “response.”

With regard to [1] and [2], we find it disturbing that the Dallas Fed not only does not keep internal logs of who visits the Fed (or whom the Fed visits), but especially that there is no internal log of whom the President meets with as part of ordinary course of business.

This is troubling when one considers that as part of its routine disclosures, the NY Fed not only keeps a detailed log of the President’s daily schedules but also makes them publicly available each quarter (link to the most recent one). One wonders how the Board, and the president, holds itself “reasonably” accountable to the public if there is no internal record at all of any in house meetings, which clearly become a relevant topic in issues such as this.

As for [3], we will gladly readdress the question in the proper semantic protocol, and will follow back with another FOIA requesting the explicit financial records of bank energy loan books which the Fed has collected as part of its recent diligence efforts to uncover which banks are underreserved, the same diligence that prompted the Fed to pursue the procedure that prompted our article in the first place, a procedure which the Dallas Fed alleges “there is no truth” to.

We look forward to discovering what excuse the Dallas Fed will provide to not supply the requested information in that particular FOIA request.

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