Debt "repos", swaps and other clever lies

Debt “repos”, “swaps” and other clever lies have been the most insidious financial fraud tool of our times. It turns out many countries used some version of the hide-your-debt two-step to qualify for entry into the Euro in 1999. ENRON used similar techniques to perpetrate massive fraud and go bust in 2001. (If you have not seen the documentary on this, watch it now. It will help you understand a lot about what has happened since. You can rent the DVD or see it on line here: Enron, the smartest guys in the room.
This Wall Street Journal chart shows how at the end of each of the past five quarters, large banks temporarily flipped their net short-term borrowings in the repo market to lower the appearance of their risk profiles at quarter end when they release reports to the public. After quarter end, they flip it back on. See: WSJ: Managing Risk:

“Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.
That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.”

Read more: WSJ: Big Banks mask risk levels And rest assured, this was not only in America…
All the while corporate insiders: executives and directors are selling their shares at an epic clip before earnings season begins to ramp up. The ratio of the total amount of stock sales versus stock purchases in the last week was almost 5-to-1, according to the Vickers Weekly Insider newsletter. The 8-week moving average of this ratio is more than 4-to-1, according to Vickers. Vickers considers any ratio below 2 sales for every one purchase to be bullish. Above 2.5-to-1 is bearish. A reading of 5-1 is “clearly bearish: See CNBC: Corporate Insider Selling picks up before earnings.
Meanwhile back on Main Street, today’s Lender Processing Services “Mortgage Monitor Report,” declared a new US record of 7.9 million first-lien and REO mortgages now in default:

The nation's foreclosure inventories reached record highs. February's foreclosure rate of 3.31 percent represented a 51.1 percent year-over-year increase. The percentage of new problem loans also remains at a five-year high. The total number of non-current first-lien mortgages and REO properties is now more than 7.9 million loans. Furthermore, the percentage of new problem loans is also at its highest level in five years. More than 1.1 million loans that were current at the beginning of January 2010 were already at least 30 days delinquent or in foreclosure by February 2010 month-end.

The upside of this data is that due to the staggering number of defaults, it is now taking borrowers well over a year, in some cases nearly two years, to go from missing a payment to being kicked out of their home. Rent free in between, this is providing some fleeting capital to support a recent surge in consumer spending. Sound like sustainable growth??

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