LILA RAJIVA: The Mind-Body Politic
Individuals Not Ideologies
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Archive for December, 2008
Antal Fekete On the Destruction Of Capital
”Economists have failed to analyze the effect of open market operations on bond speculation. “See no evil, hear no evil, speak no evil.” I leave the problem to future researchers to find out whether economists made an error of omission, or whether they knowingly became accomplices to the conspiracy of the Treasury and the Fed in a scheme to the aggrandize the power of the federal government….”
That’s Professor Antal Fekete, refusing to mince his words.
“Here is what happens when the Federal Reserve resorts to open market operations to buy government bonds as the preferred means to increase the money supply. Bond speculators are very much alive to the need of the Fed to make periodic trips to the open market to buy the bonds. They lie in wait for the Fed. They want to preempt it; they want to buy the bonds first. Later, they would dump them in the lap of the Fed, making risk-free profits in the process at the expense of the public. The Fed does not mind being ambushed. It condones the risk free profits of the bond speculators. It all comes to the same thing: lower interest rates by hook or crook.
Destruction of bank capital
With the open market operations of the Fed providing a dependable tail-wind, the sails of speculators are bulging. The unison bullish response to monetary policy by the speculators has the effect of steadily driving down the rate of interest. The Fed could report to the boss: “mission accomplished”.
Nobody bothered to investigate the question whether the symbiosis of the Fed and bond speculators (mostly banks) might somehow have a detrimental effect on the economy. It certainly looked like a brilliant scheme of creating positive value out of nothing — nay, out of negative value! Nobody has raised the objection that there “ain’t no free lunch”, that in our world strict conservation laws govern and draw a line between what is possible and what is not. In particular, it is not possible to create value out of nothing. Any appearance to the contrary must involve the destruction of value somewhere else.
Indeed, creating bond values out of nothing has coincided with the destruction of capital. Capital consumption is an insidious process. It has no obvious symptoms. If anything, like narcotics, it has a euphoric effect on the economy. Its role is to desensitize the victim before picking his pockets. It may fatten the wage envelope, widen profit margins, jack up managerial compensation, but all that is charged to the capital account. As long as there is a capital account, that is. Trouble bursts on the economic scene when the bottom of the capital barrel has been scraped clean. Of course, by that time it is too late. Nothing can be done to stop the rot.
This is what we have experienced in the fateful year of 2008. While the capital of the banking industry was eroding, there was a feeling of euphoria, a sense of weightlessness, the exhilaration of levitation as capital consumption has given banking operations an extra lift in defying gravity. But no sooner had the last crumbs of consolidated capital disappeared than gravity came back with a vengeance and the banking industry fell out of the sky. All banks, at the same time. It was not a consequence of local mismanagement. It was not primarily a consequence of too lenient lending standards, it was not primarily a consequence of reckless risk-taking. It would have been a statistical oddity if all banks had bankrupted themselves at the same time. There was a common cause: the erosion and ultimate destruction of capital…..”
Here’s more on the details of open market operations.
Free Market for You, Fixed Market for Them
Reuters: – “American International Group (AIG.N), is prepared to ask the U.S. Federal Reserve to relax rules on its $60 billion-plus disposals program to allow bidders to use a greater proportion of shares to pay for its assets, the Financial Times said.”
Comment:
Talk about situational ethics…Do you think you can retroactively change the rules to suit yourself? Try that with the IRS, or your credit company, or the traffic cops, or with your doctor or lawyer.
But the remedy for people at the top finegling the system is not Gimme A Fix Too from everyone else, though that’s what the anti-market mavens will tell you…..
The remedy is: Unfix It For Them.
AIG’s taking a hit? Tough.
Criminal sanctions, not just civil, should be levied on financial criminals.
Change under Barack Obama
“When America’s new leader of “change” was informed of Israel’s massive air attack on the Gaza Ghetto, an area of 139 square miles where Israel confines 1.4 million Arabs and tightly controls the inflow of all resources–food, medicine, water, energy–America’s president-elect Obama had “no comment.” According to the Jerusalem Post ( December 26), “at 11:30 a.m., more than 50 fighter jets and attack helicopters swept into Gazan airspace and dropped more than 100 bombs on 50 targets. . . . Thirty minutes later, a second wave of 60 jets and helicopters struck at 60 targets . . . More than 170 targets were hit by IAF aircraft throughout the day. At least 230 Gazans were killed and over 780 were wounded . . .”
Paul Craig Roberts in Counterpunch
The Washington Post Spins the AIG Story
Just came across this, since I was out of the country in October:
Here is The Washington Post covering the story about AIG and the credit default swaps that underlay the crash in October, acting as though they were the first ones on it. No mention of the dozens of people in the alternative press, and in alternative investment newsletters and offshore news, who have been writing about this for years!
Read The Crash: What Went Wrong and then go and look at my pieces at Lew Rockwell about two months ago, including Three Card Capitalists (October 1, 2008)
Putting Lipstick on an AIG (September 19) and The Paulson Putsch. (September 25)
One of them, the more “leftish” sounding one, got linked a lot. The other two, more “rightleaning”, hardly got linked though they got passed around through email and fax among some southern Republicans with political connections, and I got a lot of private email (and some public). I swear even Newt Gingrich sounded like he was chanelling it the next day on TV when he suddenly started calling Paulson un-American, after praising him just a day or so before.
Now notice how the Post has slanted the pieces to make Rubin (Obama’s team has a quota of Rubin clones) look like the “good guy” while scrupulously avoiding calling him one of the good guys outright. Even the Post couldn’t go that far, since after all Rubin is being sued - presumably not for his goodness - and people who follow these things have no great opinion of him at all.
Then notice the book that the Post recommends people read - Richard Bookstaber’s “A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation” which is from the industry itself. Naturally, the “machine” is blamed. The structure. The way things work.
Not that I dislike Bookstaber’s book, I don’t. Here is an excellent review of it, by the way.
Bookstaber is right about risk management too.
But risk management is not the whole story. You can’t just look at structures and techniques. You have to look at who’s behind them.
You don’t want to demonize anyone, true. But events are created by actions taken by individuals, and if you don’t look at them like that, you don’t really understand what’s happening.
This is the problem (for me) with a lot of socialist analysis. It is heartfelt, well meant but analytically weak, because the objects of the analysis are not units in a calculation or cogs in a machine. They are human beings, organic, dynamic, opaque creatures. And the structures we like to analyze are only ”instantiated” in them… as a social theorist like Anthony Giddens might put it….They have no separate existence apart from them.
That’s all for now, while I go and do some research into where else I can put my little stash of winter nuts before the bear eats it all up…
Consumer Confidence At All Time Low
“The Conference Board’s Consumer Confidence Index fell to 38 in December from a revised 44.7 in November. Economists surveyed by Thomson Reuters had expected the index to rise incrementally to 45.
The separate Present Situation index, which measures how respondents feel about business conditions and employment prospects, fell to 29.4 in December from 42.3 in November. It is now close to levels last seen after the 1990-1991 recession…”
From Bernie Ebbers’ Desk…
…to your ears….
Bernie Who… you ask, as well you might. What with l’affaire Madoff still bubbling somewhere in your reticular formation, your neo-cortex can hardly digest every new morsel of corruption and chicanery spilling daily from the banquet of folly in Washington, DC, let alone recall ancient history.
Let’s see. Bernie Ebbers was the one-time CEO of WorldCom (later known as MCI) which filed for bankruptcy in 2002, the largest bankruptcy in US history at the time. In 2005, Ebbers was found guilty for his role in accounting fraud that cost $11 billion, and he was sentenced to 25 years in prison - the longest term for a CEO of a Fortune 500 company at the time, says CNN.
It was the largest of a series of financial scandals that ended the dot-com bubble and Bernie even got a section to himself in “Mobs, Messiahs, and Markets” (2007).
You can read the story here and in this column which, should properly be Bill Bonner and Lila Rajiva…. but then, you know how these things go …
But getting back to Bernie E…
He lost his $45 million mansion in Mississippi, as well as other assets, to pay off WorldCom employees and creditors. And by a strange twist of fate, the same computer which tapped out that derisive column is now resting on the very place where Bernie cooked his books.
Yes, Bernie E’s Irish Regency partner’s desk (a handsome Maitland-Smith reproduction) lies under my blogging fingers even as I type. He paid
$25,000($22,500) for it, according to the dealer. That’s ten times what the buyer paid at auction a couple of years ago (around $2,500).And it’s infinity times what I paid ($0) for the dubious privilege of writing on it.
How art the mighty fallen…
Update:
Just for those not conversant with the insane world of antiques (I don’t claim to be), some high-quality modern reproductions of antiques can actually run higher than genuine antiques. Partly, this is due to higher labor (and other) costs involved in reproducing old furniture. Partly, I am sure, it’s related to a marketing insight into human psychology. People often turn down things that are inexpensive, or even free (ask any Internet marketer), on the assumption that if it were worth anything, it wouldn’t be given away.
This, of course, is completely untrue. There are many fine things you can get for next to nothing. Only go to any antique show or second-hand book store. And then compare what you find there to some of the trash that retails at high prices. People who go in for reproduction furniture believe they are getting something cheaper than they would other wise. That makes them less sceptical about prices. They also tend to know less about antiques, to begin with. That combo means they can end up paying far too much…
Now, that tells you something about Bernie Ebbers….and Bernie Madoff.
And something about the psychology of mass market investing as well…
And those McMansions that imitate European castles and come with price tags equal to or even higher than them….
It’s all good news for the mom-and-pop investor with a hard head who at last has his (or her) revenge on the high-rolling housing speculators
who’ve kept him out of home ownership …
Look around.
There are cheap houses everywhere. Wall Street will tell you this is a bad thing.
I say it couldn’t be better. Young people starting out at last have a fair shot at owning a home without a killer mortgage attached…
Some people’s housing bust is other people’s after-Christmas sale. It all depends on where you are.
And in that vein, here’s an interesting piece on pawnshops as the new lender of last resort.
Safe haven Buying Rises on Israeli Attack on Gaza
Gold needs to fall below $830 or to beak $865 to get out of its trading range, which is fairly wide ($35).
It’s up today, trading around $875-880 on news of the the Israeli attack on
HamasGaza ( I corrected this in response to a thoughtful criticism). The volume of trade is light (as it was on December 26, Friday) and more volatile than normal. We will see at the close of the half-day whether it’s likely to move to the $885-$900 zone.Otherwise, it could have put in a top (short-term) after its recent run up.
If so, we could go through support and back under $820 and even $810.
That’s short term. Longer term, fundamentals are strong.
Meanwhile, confirming that investors are still most worried about the return OF their money, rather than ON it (to quote some wag), the Swiss franc shot up further, even though the Swiss economy seems to be contracting, according to recent financial news.
Apparent Suicide of Madoff Fund Manager, De La Villehuchet
In ABC’s report on the apparent suicide of La Villehuchet, I find this:
“European fund managers who knew de La Villehuchet described him to ABCNews.com as a man who inspired “a lot of respect, honour, humanity, kindness and generosity.” They said Villehuchet had a strong belief in Madoff and had not only committed his own money to Madoff, but did so with 150 percent leverage — in effect, his potential losses were greater than his actual wealth.
Access International’s LUXALPHA SICAV-American Selection fund invested solely with Madoff, and is one of several large funds that has been the subject of the ongoing federal investigation into what prompted them to place large amounts of client money with Madoff despite red flags that had been raised for well over a year by some inside the hedge fund community. The fund had at least $1.4 billion and perhaps closer to $2 billion in money under management, placing it in the top tier of funds that appear to have lost most if not all of their investment in the scandal. …”
Comment:
The most interesting parts of this to me are:
1. 150% leverage as late as this year.
2. De La Villehuchet took over Lux-Alpha, the fund invested in Madoff, only recently.
3. Lux Alpha had been set up by banking giant UBS.
4. UBS has been the hardest hit European bank on subprime, and was under investigation.
There are many more dots connecting in my mind that I’d prefer not to put up on my website now.
I was among the first to note that Madoff couldn’t have been alone.
I will now go on record and say that what I’ve read so far indicates a very extensive web of associates, some at the highest levels of finance and government.
And as a bonus Christmas present, I will add that there is likely some connection to money laundering……
Financial Follies: Which Cookies and Which Jar?
Sorry. I must be stupid. I still don’t get it.
Bernie Madoff started a fund back in the 1970s (Correction, 1960).
OK. This fund took people’s money and held it, giving them returns of around 10-17% (or 20%), according to different reports. People knew they got this return because they saw the statements.
The statements, which I posted earlier, were fake, but noone could tell. The returns, some now say, were suspicious, but at least one financial algorithm (or “metric”…how’s that?…that’s a nice trendy word meaning nothing much more than measurement) apparently didn’t catch the fraud, if it was that.
There were other odd things. The fund sold its assets at the end of each year and bought them back the next to avoid disclosing what it owned. You could get your statements in the mail but not on the net. Odd, but you trusted the guy and said nothing.
So far so good.
Through savvy networking and good PR as a philanthropist, Madoff played off his SEC/Nasdaq connections to sell this confidence trick to a huge number - some 4000 - clients from the creme de la creme of the NY, Florida, and European money worlds.
Now, here’s the problem. That might make sense over 2, 3, or even 5 years. But apparently, this went on for 48 years, without triggering anything more than cursory investigation.
That I don’t understand. Weren’t there several collapses of the stock market and the economy in that period? How does a Ponzi scheme survive repeated deflations in asset values? Don’t people come out of the woodwork during a crash asking for their money back?
And how do we know that everyone now claiming a loss actually did lose their money with Madoff? If his books are so unreliable, how would anyone know anyway? What if some of them made money with him, got rid of it, and are now claiming a loss? Or are exaggerating their losses. That would help them get government funds or collect on insurance or win legal remedies. Has anyone thought of that?(Sorry to be so suspicious and without offense to those who really did get hurt).
If Madoff was so in bed with regulators, what’s to stop the regulators pouring over his books in private. What’s to stop them from cooking the books to create whatever appearance they want?
Suppose Madoff is only taking the fall for someone much bigger? And all this to-do is intended to throw dust in our eyes while some more complicated scheme is being put together? (Remember the so-called rescues we saw this summer and fall?)
Take this description in the Telegraph:
“The investors who have come forward – many of whom had no idea their money was being managed by Madoff due to the complex scheme he operated, by which certain funds fed into others – have so far claimed losses of $35 billion, still some $15 billion shy of the $50 billion total that Madoff is alleged to have mentioned to his two sons, Mark and Andrew. That alleged confession was triggered after investors whose fingers had been burnt by the financial crisis asked Madoff for their money back – they wanted $7 billion, but there was only $300 million in the bank. The system of sucking in new money to pay existing investors, which federal investigators allege had gone on since at least 2005, could not continue. Madoff’s group of companies is now under federal control, with investigators from the FBI, the Securities and Exchange Commission (SEC), and the US attorney-general’s office camped in the firm’s headquarters, the so-called “Lipstick Building”, poring through reams of paperwork… ”
Now, where did all that money go? Was it just the falling market? What about his trading returns? And that secret firm he also ran, which even his sons knew nothing about?
More here at Bloomberg:
In its 1992 lawsuit, the SEC claimed accountants Frank Avellino and Michael Bienes began raising money in 1962 and placing it with Madoff while promising investors returns of 13.5 percent to 20 percent, according to court documents obtained by Bloomberg. As of October 1992, their firm, Avellino & Bienes, had issued $441 million in unregistered notes to 3,200 people and entities, court papers say. They invested solely with Madoff, who opened his business in 1960.Avellino and Bienes, who were represented by Sorkin, agreed in November 1992 to shut down their business and reimburse clients. Lee Richards, the court-appointed trustee over Avellino & Bienes, hired auditors Price Waterhouse to scrutinize the books of the firm, which operated as an unregistered investment company, according to the SEC…”
Madoff Mess Hits Everyone: Fairfield Group Sold Madoff to Foreign Funds
“Over the past few years, Fairfield was successful selling in Europe, thanks to the ability of Mr. Noel’s sons-in-law to tap wealthy individuals and banks there. Andres Piedrahita, who married Mr. Noel’s eldest daughter, was particularly skilled at weaving a social network in Madrid and London, those who know the fund say.
In a presentation about 18 months ago, Mr. Piedrahita pitched a Madoff-related fund to a wealthy London individual investor, according to David Giampaolo, chief executive of Pi Capital, a money-management firm, who was invited by the investor to sit in on the presentation. Mr. Piedrahita stressed the fund’s years of steady and attractive performance. “The thing I remember hearing that I liked was the longevity and the consistency” of returns, Mr. Giampaolo said.
But he says the presentation was thin on details about the investment strategy. When pressed to articulate how the fund generated the performance, Mr. Giampaolo said, “There was no deep scientific or intellectual response.” The wealthy individual didn’t invest. A spokesman said Mr. Piedrahita wasn’t available for comment.
Still, banks on two continents offered investors souped-up versions of the Fairfield Sentry fund, designed for funds-of-funds clients and wealthy private-bank clients clamoring for consistent investment returns and access to Mr. Madoff. These products were backed by loans from banks including Banco Bilbao Vizcaya Argentaria SA and Nomura Holdings Inc., according to documents reviewed by The Wall Street Journal. These banks loaned money designed to amplify the gains of the Sentry funds. Nomura on Monday said its exposure to Mr. Madoff was about 27.5 billion yen, or about $304 million. A Nomura spokesman Thursday declined to comment further….”
Comment:
The WSJ is reporting that Walter Noel’s Fairfield Group, which actually had a former SEC officer on board, was the channel through which the Madoff fund was sold to a range of foreign investors looking for steady positive returns. Fairfield charged stiffly - 20% of the return plus 1% in fees - for what they claimed was their technical skill in analyzing/supervising the investments. In practice, they simply turned the fund over to Madoff.
The SEC official, Tucker, was at the Commission from 1970-1978. He left and went on to co-found Fairfield Group with Walter Noel, to whom he introduced Madoff in 1989. The firm was apparently a family-run outfit, like Madoff’s, in this case, with 4 sons-in-law of Noel (and Tucker) in charge.
Apparently, investigations in 2006 found no proof of fraud, but determined that Fairfield hadn’t properly disclosed its connection to Madoff.
The Times (UK) is reporting that Mary Schapiro, Barack Obama’s choice to head the SEC, picked one of Madoff’s sons, Mark, to serve on the board of the very division (the National Adjudicatory Council) that reviews disciplinary actions by the Financial Industry Regulatory Authority (FINRA), of which she is the current chief executive. (my emphasis)And this:
” At the time of Mark Madoff’s appointment, Ms Schapiro was serving as president of the National Association of Securities Dealers (NASD), according to the Wall Street Journal, which was consolidated with the New York Stock Exchange Member Regulation in 2007 to form Finra. ”
The whole business is so peculiar and so irregular it boggles the mind that no one caught on. (Actually, someone did and sent tips to the SEC, which was why it looked at Madoff in 2006).
It’s clear where the problem lies:
Consolidation, Centralization, and Corruption
The three go together. The people who want to control and corrupt the process are usually the people pushing for consolidation and centralization. Without that, with local authorities, with inefficiencies between different markets, different regulatory environments, its hard to make changes, fiddle with books or do anything on a grand scale. The greater the degree of centralization, the more power in any one spot, the more the potential for that spot to be taken over by a cabal.
Financial Follies: Goldman Alum to Head CFTC
“Obama to appoint Gary Gensler to lead Commodities Futures Trading Commission — AP.”
Gensler is a former undersecretary of the treasury and assistant secretary of the treasury.
Gensler is a Goldman Sachs alum and a Treasury man. Obama is putting one of the key figures in the Gold Cartel scheme into the top role at the CFTC. Talk about the fox guarding the henhouse!”
More by Bill Murphy of the Gold Anti-Trust Action Committee
Trader Psych: Incredible Dollar-Swissie Reversal
“USDCHF – Recent US Dollar/Swiss Franc price action is a testament to the effectiveness of Speculative Sentiment Index-based currency forecasts. Forex trading crowds had remained heavily net-short the USD/CHF since July, and the pair went on to mount an impressive multi-month rally. Most recently, that same crowd capitulated and actually went net-long the USD/CHF near the 1.2000 mark. The US Dollar subsequently went on to post its biggest monthly loss against the Swiss Franc in history—incredible by any standards. Looking to very short-term trading, the crowd is currently net-short the pair, with short positions outnumbering longs by 1.08 to 1. Such a flip gives us reason to look for a reversal, but a sharp drop in open interest gives us little conviction in our forecast. Our forex trading signals previously went short the USD/CHF for sizeable profits, but the strategies now hold a weaker bias….”
Comment:
This was quite a move up for the Franc and it shows why trading currencies in a regular (non-trading) account is hard to do.
I had planned to buy Swissie at the end of last week and then decided that the dip in the dollar from 86 - 83 on the Dollar Index had already priced in a Fed cut. So I held off, waiting to do it on Monday.
Then came Madoff. And on Tuesday, a Fed rate cut that was historic.
And as a result, from Monday to Wednesday, the dollar lost more than half the gains it made this fall. The Swissie shot up. A great trade on Friday looked almost risky by Wednesday. What if the Swissie fell back after that surge? Trader sentiment switched to shorting the dollar.
As if to confuse sentiment again, at Thursday close, the dollar had recovered some of its footing against the majors.
In Forex, trying to look for a bottom (as I was trying to do with the Swissie) takes just a little too much time for action that quick. Crowd sentiment out there is as volatile as it could possibly be.
Now the crucial thing is if GLD (the ETF, as a proxy for the spot price) can hold above 850 and the dollar over 80 by Friday close. If they do, a trend reversal of the pair will be confirmed technically.
Note: I am talking about GLD and the dollar as inversely correlated, once again. They had decoupled for a while but have returned to their inverse relationship recently.I don’t know how long that will last though. Not very long, I suspect. Notice that GLD is moving out of synch with other commodities. Oil, for instance, is down at 41/2 year lows. GLD’s move, in step with the Swissie, typified a rush to safety.
Website Rankings on Google
I’d hate to think the Powers That Be have so little to occupy their minds that they might actually waste time censoring my site.
So, let me put down to the Whims of the Web, such things as broken links, comments that vanish….and the mysterious problem I’ve had with my old free wordpress site, lilarajiva.wordpress.com, showing up at the top of google searches of my name, but not this one.
Some algorithm or other?
But today. I really am beginning to wonder. I did a search with Altavista and Yahoo and sure enough, this site appears at the very top as lilarajiva.com.
Hmmm. What is going on? And what to do about it? The old site is one I can’t access and free wordpress blogs can’t be redirected.
Propaganda Nation: Rubinomics and the Madoff Mess
Notice how the Madoff scandal is being covered by the media. Madoff’s ethnicity is being played up. Frankly, it was not the first thing most people thought of. The first thing that came to my mind was “Ye gods! A Nasdaq chairman FAKED account statements for maybe 2 decades and no one noticed!”
However, leave it to the mainstream media to drag anti-Semitism into it and then try and deflect this imputed anti-Semitism by offering us outright fibs. The main targets of Madoff’s fraud were Jewish charities, is the suggestion. They were not. Even with the latest upward revision of the amount lost by Jewish charities, the main victims were foreign banks, like Santander and Medici, and American funds like Fairfield Group in Greenwich, Connecticut.
Also, unnoticed went the filing of a lawsuit against Robert Rubin, former chairman of Citigroup, for defrauding shareholders. The suit calls it a type of Ponzi scheme.
The media coverage of Madoff distracts from the fact that subprime debt itself was the mother-of-all-Ponzi schemes, and ripped off investors all over the world.
And the culprits, members in good standing of the Banking Mafia of Sachs & Citi et. al., are far bigger than Madoff…..
Churchill on Fighting
“Still, if you will not fight for the right when you can easily win without bloodshed, if you will not fight when your victory will be sure and not so costly, you may come to the moment when you will have to fight with all the odds against you and only a precarious chance for survival. There may be a worse case. You may have to fight when there is no chance of victory, because it is better to perish than to live as slaves.”
-Winston Churchill
Market Manipulation: Whither the Dollar…and Whence
From a comment at Follow the Money blog on the dollar’s sharp move up this fall, during the crisis:
“One of the interesting patterns in the events of this year is US banks using margin calls and collateral liquidations to export deflation globally. They appear to coordinate the margin calls, for example, the prime brokers MS, GS and JPM all raised margin by more than double on thousands of hedge funds on 1-2 October while they were simultaneously railroading the TARP through the House. Margin was due two weeks later, coinciding with a massive sell off in quality assets worldwide, especially gold and oil.
The result is deflation overseas much worse than in the US, particularly to emerging economies where liquidity was more concentrated in the few big players and the hedge fund/private equity funds.
As they have forced sell-offs abroad, they repatriate the margin or collateral proceeds, driving up the dollar and inflating the relative performance of US assets.
Jobbing backwards, it was clear this margin deleveraging occurred in January, March and October - at the very least. As prime brokerage is largely unregulated and data is unreported, this happened outside the normal visibility of the markets.
It would be interesting to know how closely involved Geithner and Paulson are in these margin calls.
It will also be interesting to watch what happens when the deleveraging hits its limit, as the dollar will then be much more difficult to fluff….”
Comment:
Looks like the dollar is on its way down now.
VOLUNTEERS NEEDED
To anyone reading this blog, I am looking for people interested in helping cope with the vast amount of information I would like to synthesize and put together so that people can connect the dots in a way that current news formats, even on blogs, don’t allow.
Topics that I am following, some of them intermittently can be gaged from my archives and categories sections.
My whole blog has to be revamped into a website format and then I need to update the following ongoing stories:
1. Virginia Tech (a settlement was reached this year)
2. Goldman Sachs/banking cartel fraud
3. Finance and 9-11
The torture story has been so widely and heavily covered, I don’t see a need to follow up on it except in relation to these stories.
Any offers of help should be sent to lrajiva@hotmail.com
Global Games: Will the Indian Market Be Affected?
Some argue that the Indian market will be only temporarily affected by the financial crisis because Indian banks had no exposure to the sub-prime crisis.
But it isn’t so clear-cut.
As to the banks:
In the first place, at least one affected bank, HSBC, the world’s fourth biggest bank, with a market value of more than $200 billion, is invested in the Indian market.
HSBC ended the year up by 21%, apparently because the $17 b loss it took on subprime in the US (98% loss) was made up by its gains in Asia. But HSBC has had other problems, including litigation rising from the subprime hit and another hit from its exposure to Madoff’s fund. What’s more, Knight Vinke, the activist investor based in Monaco, claims that HSBC”s losses would be twice as high as it admits to if it followed the same accounting rules as its rivals. (Shades of G Sax).
HSBC, headed by Naina Lal Kidwai (more on her at my blog in a post on Indian women business leaders), is also focusing rather heavily on India, with plans to penetrate the insurance and investment bank business.
Looks like it doesn’t have than much else profitable about its other ventures.
HSBC isn’t the only one.
There are a number of other banks described as actively involved in or interested in the Indian market - among them, Fullerton India and Stanchart, according to this piece in Sept 2007 in The Business Standard.
In the second place, subprime exposure isn’t easily ascertained at all, since the risk is separated into different levels and rebundled in rather opaque ways.
Thirdly, we cannot know for sure that there is no corruption involved when the Indian government denies that any banks have exposure.
Fourthly, Goldman Sachs and other banks and funds have been investing quite a bit in the Indian commercial market, so there might be an exposure there, apart from what is or is not present in the residential real estate market,
Besides the banks, there are other economic factors:
Foreign Institutional investors (FII) are only one part of the picture. So the fact that they have been regulated or may have played a smaller role than a worst case scenario doesn’t dispose of the problem of contagion.
World markets affect India in other ways, as Susan Thomas points out in the Economic Times.
1. Many Indian companies are multinationals themselves and produce in and export to foreign countries.
2. Many large Indian companies, like Infosys, are heavily dependent on exports. When they are affected by world markets, they pass on the volatility to their customers. Often this influence is disguised by the existence of intermediary companies.
3. Producer prices tend toward parity across the globe, thus affecting the industries buying products and those industries’ share prices.
No surprise then that Indian industrial production has fallen for the first time since 1992, a predictable consequence of the flight of foreign investors from the stock market, dampening of industrial production, fall in exports and decline in domestic demand… among other things….
Notably, India stock exchanges was the worst performing of the emerging market exchanges in February 2007, a situation quite different from the drop in 2006.
On the plus side: fundamentals remain good and liquidity is strong
But with the worsening news on all fronts, and the latest terror (?) attack in Mumbai, the hope is a little tinged with fear.
Madoff Fraud Hits Everyone..
“NEW YORK – The list of investors who say they were duped in one of Wall Street’s biggest Ponzi schemes is growing, snaring some of the world’s biggest banking institutions and hedge funds, the super rich and the famous, pensioners and charities.
The alleged victims who sunk cash into veteran Wall Street money manager Bernard Madoff’s investment pool include real estate magnate Mortimer Zuckerman, the foundation of Nobel laureate Elie Wiesel, and a charity of movie director Steven Spielberg, according to the Wall Street Journal.
Among the world’s biggest banking institutions, Britain’s HSBC Holdings PLC, Royal Bank of Scotland Group PLC and Man Group PLC, Spain’s Grupo Santander SA, France’s BNP Paribas and Japan’s Nomura Holdings all reported that they had fallen victim to Madoff’s alleged $50 billion Ponzi scheme.
The 70-year-old Madoff (MAY-doff), well respected in the investment community after serving as chairman of the Nasdaq Stock Market, was arrested Thursday in what prosecutors say was a $50 billion scheme to defraud investors. Some investors claim they’ve been wiped out, while others are still likely to come forward….”
Comment:
I have been watching the unfolding of the Madoff story keenly. A fund manager in a European country confided in me recently that he feared his own extremely conservative fund might have unwittingly been exposed to Madoff’s fund. He thought he might have taken a big hit and being a conscientious guy was agonizing over how to repay his clients.
This is why I’ve avoided saying that any country’s banks are free of exposure (even India’s). No one knows for sure where a lot of the debt passed around the globe actually is - slicing and bundling risk separates it out.
Here are some pointers:
1. Be suspicious if you have had exceptionally high rates of interest. High returns usually mean risky investments.
2. Be suspicious if the product is marketed aggressively.
3. Be suspicious if the rate of return has been exceptionally stable, even if it isn’t very high. In the kind of volatile market we’ve had in the past few years, no one can be that good on a regular basis. (That’s what tipped me off about Goldman Sachs two years ago. I figured they couldn’t be doing all that well. Well, they weren’t.)
4. Be suspicious of alternative investments you don’t understand.5. Be suspicious of traditional “safe” investments you do understand. Take a look at their fee structure. Many “safe” investments like mutual funds have horrendous fee structures that prevent you from making anything, after taxes.
6. Be suspicious of funds touted heavily by the mainstream financial press. They are in bed (some financially, some politically) with the financial establishment, or they are ignorant, or careless, or too much in awe of Wall Street, or overworked, or brainwashed, …..or all of the above.
7. Be suspicious of funds touted heavily by the alternative financial press. Just because they are right about the big crooks on Wall Street, it doesn’t mean they aren’t crooks too….who would be doing the same if they could get away with it.
8. Be suspicious of people who tell you they made huge killings on this or that and want to let you in on it. If they made that much money on it already, chances are there’s nothing left for you….
9. Be suspicious of very quick returns. Easy come, easy go. What goes up that fast can go down twice as fast.
10. Be suspicious of very slow returns. Locking up your investments forever guarantees that any mistake you make in picking the investment will last a life time.
Bottom line? BE SUSPICIOUS.
Ken Wilber On the Dangers of Magical Thinking
A welcome antidote to the magical thinking of many New Age gurus from writer Ken Wilber:
“The New Thought schools, of which Christian Science is the most famous, mistake the correct notion “Godhead creates all,” with the notion, “Since I am one with God, I create all.”
This position makes two mistakes, I believe, which both Emerson and Thoreau would have strongly disagreed with. One, that God is an intervening parent for the universe, instead of its impartial Reality or Suchness or Condition. And two, that your ego is one with that parent God, and therefore can intervene and order the universe around. I have found no support for that notion in the mystical traditions at all.
Advocates of the new age themselves claim that they are basing this idea on the principle of karma, which says that your present life circumstances are the results of thought and actions from a previous lifetime. According to Hinduism and Buddhism, that is partially true. But even if it were totally true, which it isn’t, the newagers have, I believe, overlooked one crucial fact: According to these traditions, your present circumstances are the results of thoughts and actions from a previous life, and your present thoughts and actions will affect, not your present life, but your next life, you next incarnation. The Buddhists say that in your present life you are simply reading a book that you wrote in the previous life, and what you are doing now will not come to fruition until your next life. In neither case does your present thought create your present reality.
Now I personally don’t happen to believe that particular view of karma. It’s a rather primitive notion subsequently refined (and largely abandoned) by the higher schools of Buddhism, where it was recognized that not everything that happens to you is the result of your own past actions. …
And so where does that notion itself come from? Here I am going to part ways with Treya and spin out my own pet theories on the people that hold these beliefs. I am not going to relate compassionately to the suffering these notions cause. I am going to try to pigeonhole them, categorize them, spin theories about them, because I think the ideas are dangerous and need to be pigeonholed, if for no other reason than to prevent further suffering. And my comments are not addressed to the large number of people who believe these ideas in a rather innocent and naive and harmless way. I have in mind more the national leaders of this movement, individuals who give seminars on creating your own reality; who give workshops that teach, for example, that cancer is caused solely by resentment, who teach that poverty is your own doing and oppression something you brought on yourself. These are perhaps well-intentioned but nonetheless dangerous people, who in my opinion, because they divert attention away from the real levels - physical, environmental, legal, moral, and socio-economic, for example - where so much work desperately needs to be done.
In my opinion, these beliefs - particularly the belief that you create your own reality - are level two beliefs. They have all the hallmarks of the infantile and magical worldview of the narcissistic personality disorder, including grandiosity, omnipotence, and narcissism. The idea that thoughts don’t influence reality but create reality is the direct result, in my opinion, of the incomplete differentiation of the ego boundary that so defines level two. Thoughts and objects aren’t clearly separated, and thus to manipulate the thought is to omnipotently and magically manipulate the object.
I believe that the hyper-individualistic culture in America, which reached its zenith in the “me decade”, fostered regression to magical and narcissistic levels. I believe (with Robert Bellah and Dick Anthony) that the breakdown of more socially cohesive structures turned individuals back on their own resources, and this also helped reactivate narcissistic tendencies. And I believe, with clinical psychologists, that lurking right beneath the surface of narcissism is rage, particularly but not solely expressed in the belief: “I don’t want to hurt you, I love you; but disagree with me and you will get an illness that will kill you. Agree with me, agree that you can create your own reality, and you will get better, you will live.” This has no basis in the world’s great mystical traditions; it has it basis in narcissistic and borderline pathology….”
Comment:
I posted this quote just after the quote I posted from Deepak Chopra, one of the most popular dispensers of New Age thought. I think it provides a corrective to some aspects of that thought. It’s not that I dislike Chopra or his brand of popular Hinduism. I don’t….at least, what I’ve read of it, which isn’t all that much. I think it has its uses. And apparently, millions of people agree with me on that. I also don’t think his comments about terrorism to CNN in November - which provoked a sharp reaction from Dorothy Rabinowitz of the Wall Street Journal - are as off-base as she writes. They aren’t. He probably knows more about terrorism in India than she does.
But there is a tendency in a lot of New Age thought - one that gets amplified by the narcissism and consumerism of mass culture - to relate everything to the “inner” world of the self (the model of the self as “inside” and apart from its relation to the material world… and to others… is itself problematic). This tendency to dismiss logic, rationality, and the sheer materiality of life; to refuse harsh emotions, physical facts, and the intractability of things - this is problematic.
I’ve written elsewhere on the dangers of magical thinking. Here, for example, is a piece I did on Ward Churchill’s description of 9-11 as “roosting chickens.” It’s an interesting read, today, after the latest wave of terrorism in Mumbai.
In any case, here is the rest of Wilber’s critique in “Grace and Grit.”
(Note: I only know one book of Wilber’s - “Spectrum of Consciousness.” I thought its synthesis of elements from different religions tended to gloss over differences, in an effort to systematize, although it was fairly interesting and useful in other respects. It’s actually been some time since I read it, though, so perhaps I am doing it an injustice. It’s not the kind of thing I like to read any more. I prefer books that are more experiential, biological, and/or psychological.
Right now, in fact, I read a lot of peak performance literature.
Chopra on Wealth versus Money
“Recognize the difference between wealth and money. Wealth is the progressive realization of worthy goals, the ability to love and have compassion, meaningful and caring relationships. There’s $2.9 trillion circulating in the world’s markets every day, less than 2% of which goes to provide goods and services to humanity. The rest is one big casino, making money off money or losing money off money. We have a culture where we spend what we haven’t earned to buy things we don’t need to impress people we don’t like, and now the situation is such that we are being drawn to find the real meaning in our lives.”
- New Age guru, Deepak Chopra
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