Friday, December 31, 2010

Jim Quinn,

"Where Are All the Jobs?"


"The profits are being generated on Wall Street through collusion with the Federal Reserve, as the insolvent Wall Street banks accept free money from the Federal Reserve to generate speculative profits at the expense of senior citizens earning 0.20% on their CDs. The mega-multinationals are 'earning' their profits by continuing to ship American jobs overseas at a record pace. The Economic Policy Institute, a Washington think tank, says American companies have created 1.4 million jobs overseas this year. The additional 1.4 million jobs would have lowered the US unemployment rate to 8.9%, says Robert Scott, the institute’s senior international economist...The hollowing out of the American economy has been going on for decades and despite the usual rhetoric out of Washington DC, it continues unabated today....

"We’ve degenerated from a productive, goods-producing society to a consumption-based, debt-fueled society. This is a classic late-stage trait of declining empires. Rome and Britain before us experienced similar declines....

"The wealth of the country has been pillaged by an elite group at the very top of the economic food chain who were able to reap the rewards of globalization (outsourcing American jobs), manipulate the debt-based financial system through synthetic fraud products, and avoid taxes by hiring thousands of lawyers, accountants, and tax consultants."

Complete commentary viewable at Minyanville.

Wednesday, December 29, 2010

Kitchen Temperature Rising

Still want to own this bank?

Yesterday Allstate Corporation filed suit in federal court against Bank of America and its Countrywide mortgage subsidiary over Countrywide's sale to Allstate of $700 million in residential mortgage-backed securities that were designed to fail.

Allstate alleges "material misrepresentations and omissions regarding the riskiness and credit quality of the Certificates in which Allstate invested." Further:

"This systemic abandonment of Countrywide's stated underwriting guidelines infected all of the loans it securitized. Whereas Allstate was made to believe it was buying highly rated, safe securities backed by pools of loans with specifically-represented risk profiles, in fact the Defendants knew the loans offloaded onto Allstate were a toxic mix of loans given to borrowers that could not afford the properties, and thus were highly likely to default."

Even though the Countrywide abuses took place before its merger with Bank of America in 2008, Allstate insists that Bank of America is "successor in liability to Countrywide and is jointly and severally liable for the wrongful conduct alleged herein of the Countrywide Defendants."

It is difficult at first glance to evaluate what the hit to BofA would be if the Court finds in Allstate's favor. Allstate wants a full refund on some of the securities (which would be "put back" to BofA) and a recovery of lost principal and interest payments on the securities it must keep, plus a recovery of lost market value of the latter securities. Add attorneys' fees and prejudgment interest, and we're into the hundreds of millions.

But this is just chump change in the entire universe of claims against BofA. In a 10-Q filing with the Securities and Exchange Commission dated last November 5, the company warned investors thusly about pending litigation (bottom of page 60):

"The Corporation and affiliates, legacy Countrywide entities and affiliates, and legacy Merrill Lynch entities and affiliates have been named as defendants in a number of cases relating to various roles they played in MBS offerings. These cases are generally purported class action suits or actions by individual purchasers of securities. Although the allegations vary by lawsuit, these cases generally allege that the offering documents for more than $375 billion of securities issued by hundreds of securitization trusts contained material misrepresentations and omissions...."

Did you get that? $375 billion.

Interestingly, the State of Maine has been trying to get in on this action (court docket here), even as the State's retirement portfolio holds 2.5 million shares of Bank of America stock. Message from the left hand to the right hand: SELL.

Monday, December 27, 2010

Foreclosure-gate Update

L. Randall Wray,
Economics Professor, Univ. of Missouri-K.C.


"When we peel back the layers of the real estate 'onion' what we find is layer after layer of fraud. From the mortgage brokers to the appraisers and lenders, from the securitizers to the ratings agencies and accountants, from the trustees to the servicers, and from MERS (Mortgage Electronic Registry System) through to the foreclosures, what we find is a massive criminal conspiracy—probably the worst in human history....

The scale of the problem is huge. Some estimate that as many as $6.4 trillion worth of home mortgages (33 million of them) are frauds, with destroyed or doctored documents....

Every top management official of all the biggest dozen banks, plus everyone at MERS, all officers of every servicer, rater, appraiser, accounting firm, and mortgage broker ought to be investigated for fraud. In the aftermath of the thrift crisis, 1852 bank insiders were prosecuted and 1072 were jailed. So far in this much bigger crisis there have been only 50 criminal probes and 80 civil lawsuits authorized by FDIC. It is time to get serious about the home thieves."

Complete commentary at

Sunday, December 26, 2010

Quote for the Week, Dec. 26, 2010-Jan. 1, 2011

The only difference between the Kennedy assassination and mine is that I am alive and it has been more torturous.
--Lyndon Baines Johnson, U.S. President (1963-69)

Saturday, December 25, 2010


Bank of America stock price

Santa Claus's gift to MainePERS: a two-dollar December rally. Times 2.5 million shares. Equals five million dollars.

So take it already. Mega-manager John Paulson has taken his. And better act soon. While the Western world was leaving Santa milk and cookies, the People's Bank of China was raising interest rates by 25 basis points (the second of several hikes?) in hopes of forestalling a hard landing. The Shanghai Composite Index is already down 10% since its November highs. U.S. stocks are next.

Wednesday, December 22, 2010

Pit Stop

Fed Head Ben Bernanke buying billions in U.S. Treasuries every day, day after day, from the Primary Dealer banks, using mere journal entries as currency. Then he prays. That the banks, in turn, will lend the newly created "money" into the U.S. economy, thereby boosting output, creating jobs, and restoring a credit card to every wallet. But where are the banks really putting it? Look below:

That's a copper mine you're looking at. The JP Morgans of the world, it seems, are stashing the trash cash in commodities, hoping to corner markets for their own profit. American workers, find your own sandbox and go pound sand. The Wall Street Journal reports.

Kucinich: "Fire the Fed"

The National Emergency Employment Defense ("NEED") Act of 2010

Dennis Kucinich (D-OH): "My bill would replace the Federal Reserve System’s dependence on private banks to create credit. In its place, a Monetary Authority under the Treasury Department would directly inject liquidity into the economy by purchasing much needed public infrastructure repair. Today, we have idle capital, millions of able-bodied but unemployed workers, unused equipment, and record low interest rates. These conditions are the best possible time to make a long-term investment in our nation’s infrastructure." [Complete bill here.]

Karl Denninger, Market-Ticker: "[This bill] would immediately end the abuse and extortion of The United States Federal Government by banks and other institutions who argue that they 'cannot be allowed to fail', then using that power of extortion to extract monstrous amounts of money from the economy for their personal benefit - by some estimates, as much as 20% of GDP." [Commentary here.]

2010 Census: Winners and Losers


Go west, young man.
Or south.
The 435 seats in the U.S. House of Representatives will be reapportioned.

And once Congressmen and women are properly seated, one of the things they will need to consider is how the 2010 Census data will impact projections for the Social Security trust fund. Simply put, the population of the U.S. is not growing as fast as had been thought. This is bad news for any Ponzi scheme, especially this one. If it is no longer true (as W.C. Fields once said) that there is a sucker born every minute, then who is going to pay for all those retirement benefits promised in the future for those working today?

Bruce Krasting poses this very question at

"Given that we now know that our population is smaller than SSA [i.e. Social Security Administration] had assumed and is growing at a smaller rate, there are significant implications to the retirement system. All of those implications are negative.

From the census data alone SSA will be forced to conclude A) the date that the system goes negative is not 2037 and B) the date that SSA goes permanently cash flow negative is not 2015. Just from the census data I am now forecasting that the date that the SSA goes permanently cash negative was 2008. We will never see a return to a cash surplus. The 2037 drop-dead date will be shortened by a minimum of 5 years. I say the system explodes in 2030. These are very material changes."

Tuesday, December 21, 2010

What Comes Together, Flies Apart

[click to enlarge]

An experiment gone awry? Stratfor provides a clear, concise analysis of why the European Monetary Union was formed in the first place--and why it is unlikely to survive in its current form.


Monetary union means that all participating states are subject to the dictates of a single central bank, in this case the European Central Bank (ECB) headquartered in Frankfurt. The ECB’s primary (and only partially stated) mission is to foster long-term stable growth in the eurozone’s largest economy — Germany — working from the theory that what is good for the continent’s economic engine is good for Europe.

One impact of this commitment is that Germany’s low interest rates are applied throughout the currency zone, even to states with mediocre income levels, lower educational standards, poorer infrastructure and little prospect for long-term growth...The result has been massive credit binging by corporations, consumers and governments alike, inevitably leading to bubbles in a variety of sectors. And just as these states soared high in the first decade after the euro was introduced, they have crashed low in the past year. The debt crises of 2010 — so far precipitating government debt bailouts for Ireland and Greece and an unprecedented bank bailout in Ireland — can be laid at the feet of this euro-instigated over-exuberance.

Read more: Europe: The New Plan | STRATFOR

And this from John Carney, posted at Minyanville:

"The decision by the European Union last week to create a permanent bailout fund may not end the sovereign-debt crisis but it will -- eventually -- end the European Union as we know it." [More here.]

Monday, December 20, 2010

State of the States

60 Minutes, 12-19-2010:

N.J. Governor Chris Christie tells it like it is.

And if you don't believe Meredith Whitney about the likelihood of municipal defaults, check out how municipal bonds are selling these days:

iShares S&P National Municipal Bond Fund

Sunday, December 19, 2010

Quote for the Week, Dec. 19-25, 2010

Any system produces winners and losers. If the gap between them gets too great, the losers will organize themselves politically and seek to recast the existing system--within nations and between them.
--Henry Kissinger

Wednesday, December 15, 2010

"The Fed is destroying prosperity."

David Stockman, President Reagan's OMB Director:

"We have had a Fed-engineered serial bubble, that has created the appearance of wealth, that has caused people to consume beyond their means through borrowing, and that has flushed the income and wealth of our society up to the top, as a result of the Fed turning the financial markets into a casino. These are pure casinos, they are not capital markets, they are not adding to the productive capacity of our economy....

We're getting close to the day of reckoning...."

Monday, December 13, 2010

Struggling to grow revenues, Bank of America is getting creative. You will remember that back in the mid-'oos, BofA (and its ugly stepchild, Countrywide Financial Corp.) raked in oodles of cash by making risky home loans to unqualified borrowers, then re-selling the loans (via mortgage-backed securities) to unsuspecting investors. These shenanigans helped to create the Housing Bubble, whereby way more houses were built than there were responsible mortgagors to occupy them. The Bubble began deflating in 2007 and is still deflating today. Home prices, down 30% since the peak, are expected to decline another 10-15% in 2011.

Meanwhile, the subprime loans, and even some of the prime ones, have gone bad. Those that were not securitized are still sitting on BofA's balance sheet. Some that were securitized are being "put back" to BofA because of faulty documentation, a defect that is also making it difficult for the company to foreclose on delinquent loans. Stuck with depreciating collateral, what is a predatory lender to do?

One way to fast-track the foreclosure process is to take over tax liens on distressed properties. According to The Center For Public Integrity, that is exactly what Bank of America is doing. BofA has figured out that people behind on their house payments are likely to be falling behind on their local property-tax payments as well. In other words, there is more than one way to skin a delinquent. BofA is showing up (often in disguise) at tax-lien auctions to widen their claim on residential real estate.

The taxing authorities, you see, don't really want to take property from a delinquent taxpayer. They just want the unpaid tax. So it is not uncommon for them to auction off an outstanding lien. The winning bidder settles the tax liability, effectively replacing the county (or municipality) as the debt collector. The new lien-holder gets to tack on extra fees for penalties and interest and can even seize the property through foreclosure after a certain period of time. BofA has gone one step further and partnered with a hedge fund to securitize the liens, i.e. re-selling them to investors.

So let's get this straight. Federal taxpayers bailed out Bank of America in 2008 (to the tune of $45 billion) so that said bailee can set up shop as a private tax collector. Talk about a turn-around!

Sunday, December 12, 2010

Why N.Y. State Wants To Regulate "Fracking"

Shale-gas development has a downside.

Buddy McLain Is Laid To Rest

December 11, 2010

Quote for the Week, Dec. 12-18, 2010

Democracy is the process by which people choose the man who'll get the blame.
--Bertrand Russell

Thursday, December 9, 2010

Buy Just One Silver Coin...

...and help put JP Morgan Chase and other "financial terrorists" out of business:

Global Health: Getting Bad, Or Getting Better?

Let's crunch the data to find out:

Wednesday, December 8, 2010

White Lies and Funny Money

Jon Stewart wants to put the truth serum to Fed Head Ben Bernanke:

Bank of America Settles. Again.

Christine Varney: "Stay tuned..."

$137 million sounds like a lot of money, but for Bank of America it is just a cost of doing business. Yesterday it was announced by Assistant Attorney General Christine Varney of the U.S. Department of Justice that BofA had bought a settlement against charges that the company participated in a nationwide bid-rigging conspiracy for municipal-bond investment contracts. A little over half of the settlement will go to such federal agencies as the Securities Exchange Commission and the Internal Revenue Service, while $67 million will be divvied up by the 20 states injured.

When states and municipalities are sitting on the idle proceeds of bond offerings, they will often park the money in guaranteed investment contracts until the money is actually deployed for the intended projects. That way the money generates a return until it is used. It turns out that auctions for the management rights to this money were rigged, with bidding agents steering the business to certain managers in return for kickbacks. The kickbacks ultimately came out of the hides of the states and municipalities, who received inferior interest rates.

Bloomberg reports that the probe is not over. There were other firms involved (BofA was not the ringleader, according to the DOJ), and there will be more settlements and judgments to come. "We are committed to getting restitution, full restitution," promised Varney, "to all the municipalities that were victims of this scheme." BofA will suffer no additional penalties in this case in consideration for its cooperation in the investigation.

Earlier this year BofA reached a $150 million settlement with the SEC over allegations that it had withheld material information from shareholders at a meeting in December 2008 to approve its merger with Merrill Lynch. A hundred million here, a hundred million there, and pretty soon you're talking about real money. What does that say about a company whose top claim to management prowess is the ability to extract leniency and immunity from federal and state investigators for past indiscretions?

Still want to own this bank?

Sunday, December 5, 2010

Job Creators? Where?

Yesterday Senate Republicans blocked a White House proposal to extend Bush-era income-tax cuts for families earning less than $250,000 annually. Those cuts, phased in starting in 2001, have been scheduled to expire on Jan. 1, 2011, as per prior agreement. The sunset provision had been included as a measure of fiscal discipline. Good thing, too, since the federal deficit has sky-rocketed ever since.

But a lot has happened since 2001. Back then you could find middle-class Americans at the mall. Now, thanks to the recent (ongoing?) recession, you can't find them anywhere. Millions have lost their jobs, their homes, their credit cards. They rent, and they collect food stamps. They have moved out of the Middle-Class Neighborhood, which is shrinking all the time. President Barack Obama feels that these folks are entitled to some relief, at least until the economy recovers.

Republicans agree, but feel that taxpayers in the upper-income brackets need relief as well. The GOP calls them "job creators," who theoretically stimulate the economy either through their own consumption of good and services or through direct investment in businesses that hire employees. Just ask the man who was named after those cuts, George W. Bush himself. "Lower taxes," advised the former President during his recent book tour, "enable the job creators, i.e. small businesses, to have more money with which to expand their work force." So extending the tax cuts across the board should allow these people to do what they do best. Create Jobs.

But wait. Along comes one Sherrod Brown, Democratic senator from Ohio, who says, "there is no real history illustrating that these tax cuts for the rich result in jobs."

Wait, I'm thinking to myself, these two gentlemen cannot both be right. What are we gonna do? That's it, go to the data, silly. So I did. I went to the U.S. Bureau of Labor Statistics website and looked at employment data generated by the Household Survey since World War II. What I found (illustrated in the chart above) was that the Bush decade, with all those job-creator tax cuts, was the weakest in six decades for job growth, with only 2.3 million jobs added. Each of the other decades added at least three times as many, the 1970s nine times as many. And the Bush decade even had an extra ten months of 2010 thrown in, just to be generous.

Sherrod Brown? OMG HE'S ROTM! I guess those rich folks were too busy downsizing, offshoring, and just plain speculating to, um, create jobs.

[update, 12-11-10:]

Here's another graph, which shows no discernible correlation between the top income-tax rate and nonfarm employment:

[click to enlarge]

Quote for the Week, Dec. 5-11, 2010

Nothing in life is so exhilarating as to be shot at without result.
--Winston Churchill

Saturday, December 4, 2010

Concentrating Wealth in America

What can Ben do for you?

S&P 500 stock index

High net-worth individuals benefit as
Fed-induced liquidity floats asset prices higher (above),

seven million jobs have disappeared in the last three years--
and do not appear to be coming back.

Meanwhile, there is a growing dependency on government handouts for basic survival...

Two Americas.

Tuesday, November 30, 2010

Nuking the Nestegg

BREAKING: BAC sinks to a 52-week low.

Know when to hold 'em, know when to fold 'em.
Last we knew, MainePERS was holding 'em--2,545,137 shares of Bank of America stock (as of September 30). At the end of today's trading, the stock (ticker symbol: BAC) closed at $10.94 a share. It has not traded this low since June 2009. It is down almost 9 bucks since a springtime high of $19.86. In other words, MainePERS has lost approximately $22.7 million on this sucker since it peaked.

The worst may be still to come. Julian Assange of the whistleblower website WikiLeaks promised in an interview earlier this month to release internal documents from one of the nation's biggest banks. The documents, Assange told Andy Greenberg of
Forbes magazine, will uncover "flagrant violations, unethical practices." Mathematicians have put two and two together and fingered Bank of America.

From the
Forbes interview:

These megaleaks, as you call them, we haven't seen any of those from the private sector.

[Assange:] No, not at the same scale as the military.

Will we?

Yes. We have one related to a bank coming up, that's a megaleak. It's not as big a scale as the Iraq material, but it's either tens or hundreds of thousands of documents depending on how you define it.

Is it a U.S. bank?

Yes, it's a U.S. bank.

One that still exists?

Yes, a big U.S. bank.

The biggest U.S. bank?

No comment.

When will it happen?

Early next year. I won't say more.

[Stay tuned.]

[update, 12-02-10:]

In a Bloomberg column this morning, Jonathan Weil explains how accounting irregularities at Bank of America may be disguising the company's exposure to toxic mortgage-backed securities. Bank officers thought they sold 'em; courts may decide that they still hold 'em. "The transfer of a financial asset," writes Weil, "may have to be treated as a secured borrowing" instead of a sale, absent a proper transfer of notes and documents. If courts determine that the dog ate the documents, the assets will come back to BofA--severely depreciated, I might add. Lesson for today: don't trust Wall Street's balance sheets.

Risk on.

[update, 12-06-10:]

Moody's analyst David Fanger published the following this morning:

"We still don’t know to what extent their [i.e. BofA/Countrywide's] documentation and transfer process was defective. Any such defects will increase foreclosure timelines and costs and in some cases may preclude the servicer from enforcing the mortgage altogether. We also believe the case will encourage other mortgage borrowers as well as investors in Countrywide securitizations to challenge BofA. We expect this will increase servicing and litigation costs for BofA, and could reveal defects in BofA’s mortgage servicing processes, exposing the bank to further unfavorable legal decisions."

Full comment viewable here.

Still want to own this bank?

Monday, November 29, 2010

Solution--or Dissolution?

All is not well in the Eurozone.

Will the Irish bailout plan fly? Cobbled together by European ministers over the weekend, the €85 billion financial rescue package is sure to rile the citizenry. For one thing, the first €17.5 billion is not external aid at all, but a transfer from other government accounts, most particularly Ireland's national pension reserve fund. That money amounts to half the €35 billion set aside for the country's struggling banks. The other €5o billion will go toward sustaining government expenditures.

The €67.5 billion in external loans (almost 90 billion in U.S. dollars) will carry an interest rate of 5.8%, less than the 9% currently demanded by private markets, but punishing nonetheless. This new debt comes to almost $20,000 per Irishman, woman, and child. Service on the debt could reach 20% of the Irish government's annual tax revenues by 2014.

There is still no demand that bank bondholders share in the pain. They will be fully protected until at least 2013, or so the powers-that-be proclaim. Ordinary folks have other ideas. The Irish electorate may have an opportunity as early as next year to vote out its present government, which now enjoys a 13% approval rating, according to recent polls. Prime Minister Brian Cowen, who insisted just weeks ago that Ireland did not need a bailout, now calls the new loan facility "the best deal available." But will it work? Read his lips (below).

Sunday, November 28, 2010

Quote for the Week, Nov. 28-Dec. 4, 2010

Alexander Hamilton started the U.S. Treasury with nothing, and that was the closest our country has ever been to being even.
--Will Rogers

Friday, November 26, 2010

Edifice Complex

Telling It Like It is:

Nigel Farage upbraids the European Parliament,
predicts Eurozone collapse.

Bleak Friday

Spanish-German bond spread soars to euro-era high.

"So what,"
says Spain's PM...

"Bring it on!"

While American shoppers were stampeding through store aisles like the bulls of Pamplona in the wee hours this morning, Spanish Prime Minister José Luis Rodríguez Zapatero (above) was trying to hold off the bond bears in Europe. Spain, you see, is the biggest of the Club Med deadbeats. Bond investors, wary of possible default, have driven the yield on Spain's ten-year bond up to 5.2%, or roughly double that of the rock-solid German bund. For holding such a risky asset, they rightly insist on getting paid accordingly.

Then there are the speculators who do not own Spanish bonds, but are selling them anyway, betting on still lower prices. Those notorious shortsellers are no better than wolves in the minds of many. They strike in packs and can do big damage. Zapatero challenged them in an interview earlier today. “I should warn those investors who are short selling Spain," said the Zap Man, "that they are going to be wrong and will go against their own interests.” So there.

History tells us that the bond vigilantes are not so easily intimidated. In fact, Zapatero's taunting is about like the South Koreans telling the North Koreans that they can't hit the broad side of a barn door. (That the North Koreans can we now know, because they just did.) Zapatero needs to understand that there are truckloads of testosterone coursing through the financial markets. You cannot thumb your nose at shortsellers with any expectation that they will slink away quietly into the night.

Greece (last spring) and Ireland (last week) have already applied for bailouts for their failing sovereign debts, and Portugal appears to be next. But Spain is the Big Daddy. Some question whether the European Financial Stability Facility, the the €750 billion rescue fund set up by the European Union and the International Monetary Fund, is even big enough to to save Spain. Right now it is all a confidence game. And the 8% hit to Spain's stock market just in the past week (along with sky-rocketing bond yields) suggests that confidence is waning rapidly.

Monday, November 22, 2010

Congress Choosing Well, Per Usual

[click to enlarge]

above: a slide from a presentation by

Douglas Elmendorf, Director
Congressional Budget Office

on November 19, 2010
to the National Tax Association

"The United States faces a fundamental disconnect between the services that people expect the federal government to provide, particularly in the form of benefits to older Americans, and the tax revenues that people are willing to send to the government to finance those services."

Sunday, November 21, 2010

Quote for the Week, Nov. 21-27, 2010

The most significant characteristic of modern civilization is the sacrifice of the future for the present, and all the power of science has been prostituted to this purpose.
--William James

Falcons Rock On

credit: Derek Davis, staff photographer

Mountain Valley 20, Leavitt 0

Fourth state "B" championship in seven years.

Thursday, November 18, 2010

Cassandra on Cue

Banking sector still under pressure,

says financial analyst Meredith Whitney
in this Financial Times interview
[6 min.]

80,000 layoffs coming.

(Not to mention a meltdown in the muni market.)

[postscript, 11-19-10:]

The Meredith Whitney Advisory Group, founded by Whitney in 2009, is seeking SEC approval to be licensed as a credit-rating agency, entering a field dominated by the Big Three--Moody's, Standard & Poor's, and Fitch. Her company evaluates credit risk for corporate bonds, U.S. municipal bonds, and global structured products. In her view, the Big Three did a poor job of this in the years leading up to the global financial crisis and have "lost all credibility on securitization" after consistently overrating toxic securities. Whitney outlines her challenge in this four-minute interview with Financial Times.

Whitney fills out another Big Three, joining Elizabeth Warren and Sheila Bair as arbiters of transparency in high finance. Warren has chaired the Congressional TARP Oversight Panel and is the President's special advisor on the newly created Consumer Financial Protection Bureau. Bair chairs the Federal Deposit Insurance Corporation and has been known to mix it up with the biggest Wall Street banks over their lack of disclosure and undue risk-taking.

Tuesday, November 16, 2010

Memo to MainePERS: It's Not Too Late To Sell

Market-Ticker's Karl Denninger

"potential wipe-out" for TBTF banks

If you are a beneficiary, now or in the future, of Maine's Public Employees Retirement System, you may want to click away from this page. Go somewhere else, anywhere else. Keep having your nice day. Nothing to see here.

With that up-chuck alert out of the way, let's get down to business. You already know that the State of Maine's pension fund is over-exposed to stocks generally, and to bank stocks specifically. As discussed earlier, the MainePERS portfolio has lost $20 million since mid-April in share-price depreciation for two of its largest holdings, JPMorgan Chase and Bank of America. Our "passive" fund managers continue to hold one million shares of the former and 2.5 million shares of the latter, apparently under the assumption that what goes down must go back up.

Karl Denninger is here to remind you that what goes down in the stock market can go not up, but to zero. Denninger, in a radio interview with the Mad Hedge Fund Trader, John Thomas, points out that there are still real-estate losses out there, over $2.5 trillion worth, looking for a home. They will find one in the Too Big To Fail banks (aka JPMorgan, Bank of America, and others of their ilk). The banks' exposure to "put-backs" of defective mortgages and fraudulent securities is estimated at $200 billion. And their exposure to second mortgages (typically home-equity lines of credit, or HELOCs) may be even greater. So far the banks have been able to hide their exposure through creative accounting. Denninger gives them another three to six months "before it becomes impossible to hide anymore."

[If you cannot catch the whole 40-minute interview, slide ahead to the 12:00 mark and listen to the next eight minutes. All you need to know, right there.]

Other fund managers are bailing on the banks. Why not MainePERS? Listen to David Tepper, the hedge-fund manager who famously declared on CNBC in late September that the Fed's latest round of quantitative easing is a "win-win" for stock investors. Better yet, watch what he does. As of June 30, 2010, Bank of America was his largest holding, 27.3 million shares valued at over $360 million. At the same time that he was pumping equities on TV, he was dumping 18% of his BofA.

Ditto the legendary John Paulson. As of September 30, 2010, Paulson had nearly 8% of his $23 billion portfolio in Bank of America, his third largest holding. That was after trimming 18% of his BofA in the third quarter. A year ago Paulson had a 2012 price target of $30 a share for the stock. Now he's selling it in the low teens. What does he know that MainePERS managers do not?

In Denninger's view, 2011 will be a case of sugar-hits-fan. You've heard of 30/30 players in baseball. How about this one? Denninger is looking for a stock-market meltdown that takes the S&P 500 average to 300 and the Dow to 3,000. Those valuations, which are 75% lower than where we are today, will reveal the "embedded pension fund damage" that is already in place, though not yet recognized. Eventually the federal government will step in and try to stop the bleeding. Public pension funds will be allowed to redeem their beaten-down stocks for 30-year Treasuries yielding 2%. In Denninger's words, it will be "the ultimate screw job."

But if you have clicked away like I told you to, you are still having a nice day.

[update, 11-17-10:]

Christopher Whalen of Institutional Risk Analytics explains in this five-minute interview why the big banks are a Sell. To quote, "a lot of losses in the system investors haven't seen yet...we have a distressed sale going on with some of these larger banks."