LILA RAJIVA: The Mind-Body Politic
Individuals Not Ideologies
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Archive of "Finance" Category
Cryptogon On Everbank Gold Story
An odd little story today about well-regarded online bank and metals vendor, Everbank, that I came across at Cryptogon.
Apparently, they unilaterally changed the terms and conditions of their ‘metals select’ program recently. Everbank president, Frank Trotter, responded in a letter to Cryptogon author, Kevin Flaherty, that the changes were subsequently deleted. Still, if you’re a client, you might want to be on top of that. From all I’ve heard, they’re a reliable bank, but banks change hands and terms very frequently these days (for eg. BrownCo to Harris Direct to E-trade).
Portugal and Spain In Trouble Too…
Will Frankfurt (the European Central Bank) come to the rescue of Greece, or Spain, or Portugal? Maybe in the end, but not now, reports Ambrose Evans-Pritchard in The Telegraph:
“Mr Callow of Barclays said EU leaders will come to the rescue in the end, but Germany has yet to blink in this game of “brinkmanship”. The core issue is that EMU’s credit bubble has left southern Europe with huge foreign liabilities: Spain at 91pc of GDP (€950bn); Portugal 108pc (€177bn). This compares with 87pc for Greece (€208bn). By this gauge, Iberian imbalances are worse than those of Greece, and the sums are far greater. The danger is that foreign creditors will cut off funding, setting off an internal EMU version of the Asian financial crisis in 1998.
Jean-Claude Trichet, head of the European Central Bank, gave no hint yesterday that Frankfurt will bend to help these countries, either through loans or a more subtle form of bail-out through looser monetary policy or lax rules on collateral. The ultra-hawkish ECB has instead let the M3 money supply contract over recent months.”
Mr Trichet said euro members drew down their benefits in advance — “ex ante” — when they joined EMU and enjoyed “very easy financing” for their current account deficits. They cannot expect “ex post” help if they get into trouble later. These are the rules of the club.”
Europe Thumbs Its Nose At G-Sax, Banksters
“For the first time in five years, no big US investment bank appears among the top nine sovereign bond bookrunners in Europe, according to Dealogic data compiled for the Guardian. Only Morgan Stanley ranks at number 10.
Goldman Sachs doesn’t make the table. Goldman made it to number five last year and in 2006, and number eight in 2007, the data shows. JP Morgan was in the top ten last year and in 2007 and 2006 but doesn’t appear this year.
“Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit,” said Arlene McCarthy, vice chair of the European parliament’s economic and monetary affairs committee. “It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments.”
Rogers Tells Greeks To Go Bust
Rogers gets it right, as usual. From the Wall Street Pit:
“Commodities legend Jim Rogers talks in this Bloomberg interview about Greece’s fiscal problems which needless to say are hardly a new development. According to Rogers, a bankruptcy for Greece would benefit the euro.
“They should let Greece go bankrupt,” said Rogers. “It would be good for the euro. It would be good for Greece. It would be good for everybody. If Greece went bankrupt then everybody would say, boy, the euro is serious, is going to be a sound currency and the euro would go straight up. Is not gonna happen that way, but that’s what should happen.”
Exactly right. Currencies go under because the governments behind them behave imprudently, as Cato’s Dan Mitchell points out.
Robert Wenzel, who has been right on top of the Greek story, writes:
“In fact, a Greek bankruptcy would be the best thing for the euro. It would show that the European monetary union is less subject to political pressures than individual sovereign states, for most assuredly the PIIGS, if they still managed their own moneys right now, would certainly be printing away right now.”
Had the US let the financial industry go under and refused to bail them out, the dollar would immediately have shot up. The decline of the dollar reflects the market’s loss of faith in the US and its reserve currency.
When governments act like genuine market participants - i.e. take their medicine - their currencies strengthen. Greece, acting on its own, showing independence of European bureaucratic constraints or bail-outs, would have to be a positive for the euro, because it indicates an end to the bottomless pit of financial irresponsibility..
Rogers is also right that speculation isn’t the prime mover of these events.
In the Greek case, I understand the notional value of the CDS’s (credit default swaps) involved are not big enough to impact the debt. However, for whatever reason, Rogers avoids talking about the larger issue of fraud in the use of currency swaps, fraud in the original contracts, and fraud in short-attacks, which are quite a different matter from market participants voicing their “opinion.” (the notional value of CDS in relation to debt is apparently not large in this case, though it’s important in other cases, like AIG)
Rogers, like the rest of the financial industry, is thus talking the professional ideology of the financial industry, and you can see all the others - from Mish Shedlock to Zerohedge to Chanos - lining up to defend that ideology.
It’s unfortunate, but it’s also something I feared…that some of the “citizen journalist” sites would corral popular outrage over Goldman Sachs and its allied hedge funds….and then steer that outrage in ways that protect the industry. And that they would finally end in support of the big players, while defusing the original anger into essentially useless diatribes. Meanwhile, those engaged in any action that might actually weaken the powers-that-be would be demonized and marginalized.
That’s seems to be what’s happened. Which is why the call for a ban of CDS contracts strikes me as not (necessarily) terribly useful.
My point is that that while it’s true that CDS’s have been gamed, a ban on them distracts from all the other issues of fraud. CDS’s are sold as if they’re insurance….and they’re used to gamble on price-movements. A player intent on fraud doesn’t need to rely on CDS contracts alone to commit a fraud. Ban CDS contracts, and he will just use another technique. Again, the problem is not the CDS contracts themselves, but the fraud involving them.
To recognize this, you just need to go back a bit. If you rewind twenty-five years, to Milken’s junk-bond innovations, there too what ought to have been an instrument of financing became an instrument of gambling.
Read Michael Lewis’ Liar’s Poker for a brilliant account from a former insider. Yet, today, it is Lewis, with Einhorn, who’s arguing to ban CDS’s. You’d think Lewis of all people would know it isn’t the gun that’s the problem, it’s the people who use guns to commit crimes. (Felix Salmon has a good criticism of Lewis on CDS’s at Portfolio.com).
Indeed, Lewis himself makes that point in his book:
Quote:
“Junk bonds behave much more like equity, in shares, than old-fashioned corporate bonds…… Therein lies one of the surprisingly well-kept secrets of Milken’s market. Drexel’s research department , because of its close relationships with companies, was privy to raw inside corporate data that somehow never found its way to Salomon Brothers. **When Milken trades junk bonds, he has inside information. Now it is quite illegal to trade in stocks on inside information, as former Drexel client Ivan Boesky has ably demonstrated. But there is no such law regarding bonds*** (My emphasis)
……Not surprisingly, the line between debt and equity, so sharply drawn in the mind of a Salomon bond trader (Equities in Dallas!) becomes blurred in the mind of a Drexel bond trader…” (p. 217)
Lila: Eventually, the flood of money attracted to junk bonds had to find new places to go. From that, sprang the leveraged buy-outs (LBO’s), the corporate raids of the 1980s.
Quote:
“The new and exciting job of invading corporate boardrooms appealed mainly to men of modest experience in business and a great deal of interest in becoming rich. Milken funded the dreams of every corporate raider of note: Ronald Perelman, Boone Pickens, Carl Icahn, Irwin Jacobs, Sir James Goldsmith, Nelson Peltz, Samuel Heyman, Saul Steinberg, and Asher Edelman….” (P. 220)
Lila: Transpose an octave….fast forward twenty-five years…and you could be describing CDS’s…. And just as the problem then was not the junk bonds themselves, but the use made of them (to gamble and raid companies), so too with CDSs.
Of course, the raiders saw themselves as performing a valuable service in cutting out fat from management…and in many cases, that was so. But, killing someone to cure him isn’t usually regarded as the most brilliant of remedies. Why should it be different in the financial industry?
Again, the problem is the actors and the activity, not the instrument. We need to differentiate between them. We also need to differentiate clearly between short-selling (legitimate) and naked short-selling (fraudulent); between speculation (helpful to the markets proportionate to economic activity), versus casino capitalism (extremely game-changing and dangerous where it is now); between investment (socially productive) and gambling (socially destructive); between legal and fraudulent activity.
Now they’re all mashed up and argued fungibly.
People blame either the government..or the speculators, black and white, forgetting that in many cases the speculators ARE the governments…in the sense that they’re in collusion with some of the banks that have their functionaries creating government policies, and have their advocates in the media, influencing public opinion as they wish.
More on this later….
Meanwhile, sift through the opinion-making carefully…looking for a confusion of all the terms I’ve listed. Wherever you find that confusion, be wary. Sometimes the confusion is just honest error. The rest of the time it seems to show an intent to mislead.
What China Wants
The Financial Times points out the quirks in the Chinese market that have Western companies racking their brains to stay on top of sales:
“The big spender in China, in years past and even more so today, is the state: private consumption as a percentage of gross domestic product has fallen from 60 per cent in 1968 to 36 per cent last year and could be as low as one-fifth in 2009 as the government ramps up capital investment.
In fact, the Chinese, who already have a world-beating savings rate of nearly 40 per cent of their income, tend to become more frugal when times are tough. As bank deposit rates decline, most of us spend more. The Chinese tend to stash away even greater sums to make up for the lost interest. The reason for this conservatism is the lack of a social safety net in China – citizens have to provide for their own medical care, old age and possible unemployment.
This makes them “penny pinching, ruthless, suspicious shoppers”, says Tom Doctoroff, north Asia director of advertising agency JWT and a writer on Chinese consumer trends. In a recession this behaviour only grows worse. “The downturn has made people keener on finding the cheapest deal,” says Yuval Atsmon, an associate principal in McKinsey’s Shanghai office. Even when they can easily afford it, buying a PC typically involves six visits to a store, and more often than not, customers will wait six months before making their decision after consulting blogs, online comparison sites and – the most important source of information in China – friends and family. Sales of copycat mobile phones, with all the functions of top models but a lower price, have soared from 17 million units in 2006 to 62 million units last year.
Brand consciousness is high, at least in the big cities, but brand loyalty is much lower than in the west. A price cut or good in-store promotion can often sway shoppers. And for cultural reasons, appealing to an individual’s taste or personal comfort typically doesn’t work, Doctoroff points out. A purchase either has to publicly signal status or wealth, like a flashy car does. Or provide a practical benefit: the latest craze in China is chocolate with added calcium, eaten not for pleasure but for the health benefits. The growing appeal of diamonds to women is not based on romance, but as a financial signal of a man’s commitment. Trust is another key issue in a country where so many consumer products are faked. Chinese mothers, for example, will pay 30 per cent more for safe baby milk – and this should favour foreign brands.
But foreign retailers and manufacturers have to cope with vast regional differences in demographics, language and culture that make it hard to plan a single marketing strategy – indeed treating China like a single country is usually a mistake. Natives of Zhejiang on the east coast like “toilet roll as rough as sandpaper”, the former head of Wal-Mart China liked to observe, a penchant thankfully absent elsewhere. Atsmon points out that cities even an hour apart can be entirely different: in southern Shenzhen, more than four-fifths of the population consists of migrant workers, mostly under the age of 35, who speak Mandarin and drink in bars. In nearby Guangzhou, migrants number just over a quarter, more people are older, enjoy watching Cantonese TV and go out to restaurants to drink with family members. Adequately addressing such niches requires an army of local suppliers, costly infrastructure and several layers of wholesalers and intermediaries. Even then, success may remain as elusive as it always has been: “No matter what you may be selling, your business in China should be enormous, if the Chinese who should buy your goods would only do so,” lamented Carl Crow, an advertising executive in Shanghai and author of the original book on how to sell to the Chinese … more than 70 years ago.”
Soros: Gold In Bubble; But Keep Stimulus Going…..
Always nice to see people talk out of both sides of their mouth.
Here is currency speculator George Soros (ex of legendary hedge-fund Quantum) at the World Economic Forum at Davos:
“When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold.”
So far so good. Mis-price money (cheap interest rates) and people don’t want to keep their savings in it. They want it in something that isn’t subject to mis-pricing (so they hope) - hence gold.
But then Soros shows how disingenuous he’s being by adding this:
“I think that since the adjustment process to the recession is incomplete, there is a need for additional stimulus. Some countries, like the US and European countries, have plenty of room to increase their deficits. The political resistance to doing so increases the chances of a double dip in the economy in 2011 and after that.”
That is, he’s suggesting running more deficits and keeping the money spigot going, just the thing that’s caused the gold price to rise.
So how do we understand this?
Gold is due for a technical correction, but it’s also probably responding to deflation in the general economy. It’s not going down that fast, because a lot of people are also buying it speculatively.
That’s the tug of war.
Meanwhile, who know what Soros’ holdings are and who knows what his motivations are in making such contradictory statements.
But anyone who takes these sorts of pronouncements as any kind of lead for their own investments/speculations, should be prepared to part fairly soon from their money.
David Tice On King World News: Trouble Ahead….
David Tice on Eric King’s King World News, December 23, 2009
- This is not another inventory recession; this is unprecedented
- There’s trouble all over the globe - Europe, China, Japan..
- Hunker down, cut back expenditures, get out of stocks, own gold
- Look for deflation followed by competitive currency devaluation, then inflation.
Executive Order 12425: Interpol Brings Global Police State to US
John Whitehead of the Rutherford Institute (via Lew Rockwell) sounds the alarm over executive order 12425, which places the International Criminal Police Organization (Interpol) beyond the reach of domestic laws, freedom of information act requests and constitutional checks.
“It’s hard to know exactly what the fallout from this executive order will be, but the ramifications for the American people could be ominous. For instance, if Interpol engages in illegal and/or unconstitutional activities against American citizens, it will be impossible for U.S. citizens to obtain information – via subpoena or other commonly used legal methods – regarding its records or activities.
Adrian Ash: Here Comes Stagflation
The whole inflation-deflation debate has always struck me as misbegotten. People use the terms to mean things so varied that it’s pointless to argue. But such as it is, I’m a firm believer in the deflationary thesis on the macro level… influenced in this by the economist Antal Fekete , and his theory of how capital is destroyed in a fiat money regime.
Nonetheless, I do see consumer prices rising.
In other words, asset prices fall, industry contracts, and unemployment levels stay high, while the stuff on the shelves costs more, insurance and tuition rates climb, and living in general becomes more expensive. (more…)
Bill Anderson On The New KKK: Kleptocrats, Kartels, and Kon Men
“As I see it, the bankers are not clueless at all. They understand the game, they understand that the government is going to clean up the mess that they and their friends in Congress and the Bush and Obama administrations have created, and they understand that their antics are going to give them what they always have wanted: a nice, cozy, financial cartel which will provide sweet political contributions for the political classes, bonuses and high pay for themselves, and very little for everyone else.
Sith-Lord Sweep: AG’s Pending Indictments Cover Major Hedgies, Journalists, and Regulators
Corporate finance generalist, investment banker and expert in derivatives, Austin Burrell, sums up last week’s announcement by Attorney-General Eric Holder that there are 5000 pending indictments [sic] arising out of the investigation of fraud in the capital markets:
[Note: the DOJ is involved in some 5000 odd cases of fraud related to the financial industry… (more…)
Hedge Funds: Top Ten Earners in 2007/2008
New York Magazine had a piece in 2007 that sorted the hedge-fund elites into categories like “brainiacs” (like James Simon and Jim Chanos) and “bad boys” (like Daniel Loeb).
The category “Top dogs” (that is, the very best hedgies) includes SAC Capital Advisers/Steven Cohen ($12 b); Cerberus Capital/Stephen Feinberg ($19.5 b); Appaloosa Mgt/David Tepper ($5.3 b); ESL/Eddie Lampert ($18 b); Citadel Investment Group/Kenneth Griffin ($13.5 b); Manhattan/Michael Novogratz ($4.6b).
[Note: the figures were as of 2007].
This is the short list of the managers whom the industry thinks are top dogs, and of these six, one (Feinberg) is directly connected to Drexel Burnham Lambert, convicted junk bond financier Michael Milken’s bank; another (Cohen) is connected indirectly to Milken through Gruntal & Co.; and three are alumni of Goldman Sachs(Tepper, Lampert, Novogratz).
Five out of six and that’s just a cursory examination. I didn’t do anything more than google to get that.
And the financial press thinks there are no Sith Lords?
A more conventional ranking is found below: (more…)
Lanka Needs Soros Like A Hole In The Head
“In 1992, Soros earned the epithet “the man who broke the Bank of England” by demanding the Bank to raise its interest rates or to float the currency (so that he could make more money). The Bank did neither. He retaliated by selling “short” more than $10 billion worth of pound sterling, forcing the Bank of England to depreciate the pound: Soros amassed an estimated US$ 1.1 billion in the process.
Kingsford Capital And The Captured Media
Mark Mitchell at Deep Capture has some interesting details about the extensive influence of hedge-funds, specifically Kingsford Capital, on the reporting of stories in the financial press:
“Another focus of my investigation at CJR was the appalling bear raid on a collectibles company called Escala. Not only was Escala the victim of massive amounts of illegal naked short selling, but a hedge fund convinced the Spanish government that Escala’s parent company, based in Madrid, was fleecing investors in philatelic collectibles.
Felix Salmon Gets It Right On Short-Selling
Felix Salmon gets it right about short-selling this time round, at Seeking Alpha: (December 31):
“It’s not just short-sellers, either: most financial professionals are essentially parasitical on people who genuinely add value in the real world. Old-fashioned lending is important, and I’d say that stock markets in general also count as a positive financial innovation, since they make it vastly easier for companies to raise equity capital. But in my ideal world, people working for real companies like Kodak would make more money, in general, than people working for more parasitical financial-services companies. The fact that it’s the other way around worries me. While finance may or may not be good at the efficient allocation of capital, it seems to be positively bad when it comes to the efficient allocation of the labor of intelligent and perspicacious individuals.”
DTCC Board Stuffed With Kleptocrat Banks/Funds
The DTCC (Depository Trust and Clearing Corporation) is the largest depository in the world, and, along with its subsidiaries, the place where all transactions in equities, money market funds, corporate and muni bonds, MBSs and derivatives are cleared and settled. Activists have been demanding detailed release of trades which haven’t been settled or have failed to deliver (FTD), because of the obvious potential for manipulation, A glance at the board of directors, which consists of leading figures from the banks and funds, many of whom profited hugely from the government bail-out, shows that concern is amply warranted.
From Citizen Economists:
DTCC BOARD OF DIRECTORS
The DTCC’s board includes 20 directors.
Art Certosimo, Senior Executive VP, Bank of New York Mellon
Norman Malo, President and CEO, National Financial Services LLC; Fidelity Investments
Stephen P Casper, Partner, Vastardis Capital
Gerald A. Beeson, Senior Managing Director, COO. Citadel Investment Group
Donald F. Donahue, Chairman and CEO, DTCC
William B. Airnetti, President and COO, DTCC
J. Charles Cardona, CEO Bank of New York Mellon - Cash Investment Strategies, President of the Dreyfus Corporation
Randolph L. Cowen, Co-Chief Administrative Officer, Goldman Sachs Group Inc
Norman Eaker, CAO, Edward Jones
Timothy J. Theriault, President - Corporate & Institutional Services, Northern Trust Company
Neeraj Sahai, Managing Director and Global Business Head, Securities and Fund Services, Citi
Gerard La Rocca, Chief Administrative Officer, Americas Barclays Capital
David A. Weisbrod, Managing Director and Risk Executive, JP Morgan Chase Bank
Stephen Luparellyo, Vice Chairman and Senior Executive Vice President of Regulatory Operations, FINRA
Mark Alexander, Managing Director, Global Wealth and Investment Management - Bank of America, Merrill Lynch, Head of Technology Operations, Broadcort Clearing
Ronald Purpora, ICAP Securities USA LLP
Robert Kaplan, Executive Vice President, State Street Bank and Trust Company
Michele Trogni, Managing Direcotr and Global Head of Operations, UBS Investment Bank
Ian Lowitt, Administrative Officer, Lehman BrotherWarren Buffett To Promote Paulson Book
Now, we don´t want to read too much into this announcement, but, really, promoting Paulson´s book? What´s Buffett going to say?
I really really like that chapter where Hank had to take over the US government.…you know, after he pushed Bear Stearns and Lehman over with the help of his hedge-fund buddies…and all but nationalized housing.
Or
Gee, Hank´s into that cap-and-trade collectivist boondoggle that just got outed as a total rip-off and a fraud made up by climate change fanatics but hey, give the guy a break, will ya? We´re all capitalists here…..you know, like, state capitalists..wazza big deal?
Or
Yeah, I know. Vanity Fair, that bastion of free markets and free minds, already did its bit for Hank´s place in history when it got down on its knees and..um.. blew…up.. the guy into some kind of I´m-taking-on-the-slings-and-arrows-for-the-greater-good-profile-in-courage long before me, and yeah, Bethany did her bit for Hank too.. but every little effort counts…
I´ve had my doubts about Buffett´s involvement in the bail-out.
This doesn´t make them go away…
Prem Watsa On The Uptick Rule
Prem Watsa of Fairfax Financial - one of several targets of short-selling attacks - in an interview with financial editor Diane Francis in the National Post:
“Q What stock market rules contributed to the meltdown?
A Eliminating the uptick rule [can only short on upticks in stock prices] was a mistake and so is short selling without borrowing the stock first. The ban on shorting financial institutions is lifted again and the SEC is debating whether to bring back the uptick rule again. What we need more of is transparency in all markets, including with respect to shorting and derivatives.
Q What of the role of boards of directors?
A In a bubble it’s difficult for boards of directors. Compensation should be long term. It should be stock-based and not cash. Our company’s compensation system is focused on the bottom line, not top line, and is long term. The Romans built strong bridges because their engineers had to stand under them as the army crossed them for the first time. Responsibility brings better results and aligned interest with partners.”
My Comment:
Watsa is an interesting figure to listen to on the financial crisis. Born in Hyderabad and educated in Chemical Engineering at the Indian Institute of Technology, he is the founder, CEO, and chairman of Toronto based Fairfax Financial, as well as a director and member of the risk committee at ICICI Bank in India. He’s been called India’s Warren Buffett and he did handsomely for Fairfax investors, turning shareholder equity from $2 billion in 2006 to $6.5 billion in 2009 by betting against credit default swaps.
Besides specific rules like the uptick rule, he cites the emphasis on ratings (versus due diligence or prudent risk management) and an increasingly short-term bias in the way companies, shareholders, and money managers act.
What does that amount to? A concern with the way things look, rather than the underlying reality.
It was the focus on labels and not reality that did the capital markets in. At least, that’s my generalization
Zerohedge On Banning Credit Default Swaps
Zerohedge has a technical discussion of why hedge fund manager David Einhorn’s call to ban Credit Default Swaps is essentially a call to dismantle the entire fiat money system. Some of the details elude me, as they’re very technical, but the rest seems right to me. There’s no inherent difference between a credit default swap and, say, an interest rate swap, of which there are many more. So Einhorn’s demand is in effect a demand to ban all derivatives…
“Remember the liquidity pyramid?
As the graphic shows, derivatives account for 1,000% of world GDP, in essence allowing the world to believe fiat money is worth something only courtesy of financial sleight of hand which involved derivatives and securitizations. Yet all those calling for an end to CDS also have to realize that due to CDS intertwined nature, the world fiat system would need to do away with all derivatives (not just CDS), and when you do that you basically eliminate the other hybrid asset classes: securitizations being chief among them. What this would leave us with is a liquidity pyramid which ends with bank loans, which are much more manageable and whose risk can be controlled. It would also leave the world with a fiat currency system, which would lose about 10x of its value overnight, thereby leading to an instantaneous and global unwind of fiat money, and rolling waves of domestically denominated hyperinflation. A spectacular race to the bottom of the asset pyramid. And who will rather commit suicide than see that happen: why the Federal Reserve of course.
Which brings us full circle: an attack on CDS is an attack on excess liquidity, which is an attack on the global asset/liability imbalance (as world GDP and otherwise output has no chance of catching up with the liquidity that is currently available), which is an attack on fiat money, which is an attack on the perpetually low price of gold (because if and when derivatives and securitizations are done away with and tangible assets regain their true value, gold would go up by at least the same magnitude that fiat currencies are devalued), which is an attack on the heart of our broken financial system itself, and, an attack on the Federal Reserve, the Fractional and Central Banking System in principle. Well done David.
We hope Einhorn is successful in bringing more people to understand not just what the risk implications of CDS are (while also demonstrating the positive value that they do in fact provide in a rigged and broken capital market), but also what the underlying thematic subject of his attack really is: a busted fiat system. In essence, David believes in a fresh start. So do we, because on a long enough timeline…”
My Comment
Just to make it clear - I am myself not in favor of banning all derivatives. Why? Not because I think they´re profound innovations..or vitally necessary. But I think it´s the wrong way to go about tackling the problem. Banning one set of financial instruments will only prevent the smaller players from using them. The largest and best connected players will game the ban in some way, or make use of other sorts of compensating structures. A better way would be to undo the fiat money system altogether…
So my agreementis with Zerohedge´s assessment of the situation and not necessarily with Einhorn´s recommendation on that point.
Besides, Einhorn, who made his money off of CDS´s, is an odd person to be pushing a ban.
SEC’s Own Accounting Is Deficient
Apparently, the SEC, top regulator of financial fraud, isn’t up to snuff keeping its own financial books…
We don’t say it’s cooking its books, but it sure looks like if someone wanted, they could cook them quite easily, according to this report at law.com:“The GAO found that the SEC “did not have effective internal control over its financial reporting as of Sept. 30, 2009.”
As part of its mission, the SEC is charged with enforcing strict financial disclosure rules for public companies. Apparently, it is less adept at policing itself.
For example, the GAO reported that SEC’s general ledger system allows unauthorized personnel to view, manipulate or destroy data, and that “serious unauthorized activity” may remain undetected.
Until the SEC fixes these problems, the GAO found, the SEC can’t be sure “1) its financial statements, taken as a whole, are fairly stated; 2) the information the SEC relies on to make decisions on a daily basis is accurate, complete, and timely; and 3) sensitive data and financial information are appropriately safeguarded.”
Nor could the SEC “provide evidence that it monitored controls over its payroll exception reports to ensure payroll transactions were recorded accurately and timely.”
While the GAO did credit the SEC with producing statements that were “fairly stated in all material respects,” it flagged “six significant deficiencies” for FY 2008 and 2009.The six areas are:
• information security;
• financial reporting process;
• fund balance with Treasury;
• registrant deposits;
• budgetary resources;My Comment:
Translated, those six problem areas amount to this:
No one can really be sure if or when1. Someone steals information from the SEC
2. Something is wrong in the SEC’s accounts
3. How much money the SEC has with the Treasury
4. How much money the SEC takes in
5. How the SEC is doing on an ongoing basisChew on that…
IPCC Chief Pachauri Central To Cap-and-Trade Scam
From Mish Shedlock:
“The crux of the scheme is this: European steelmakers have threatened to leave the EU for India, eliminating the jobs of thousands of workers in the process, unless the EU grants the steelmakers free carbon credits worth hundreds of millions of dollars.
Eurofer, a European trade group, is at the center of the scheme. The web of the plot, however, weaves in not only several companies, but also the United Nations’ climate change chief:* Among its members, Eurofer represents two EU steelmakers, Corus Redcar and ArcelorMittal, each of which has ties to India as well as to Rajendra K. Pachauri, the Indian industrial engineer who has been chairman of the U.N. Intergovernmental Panel on Climate Change, or IPCC, since 2002.
* Eurofer appears to have coordinated a threat to the European Union Greenhouse Gas Emission Trading System that its steelmakers would move their operations from the EU to India unless the EU cap-and-trade exchange issued them – at no cost – carbon emissions permits worth hundreds of millions of dollars.
* Once the bureaucrats in Brussels acquiesced, Corus Redcar and ArcelorMittal maneuvered to cash in windfall profits from the EU carbon permits given them at no cost.
* Additionally, Corus Redcar has now announced a decision to close operations in Great Britain nonetheless and relocate its steelmaking activities to India in order to gain additional U.N. carbon credits.
Ironically, EU and U.N. officials who might have thought requiring cap-and-trade permits would operate as “protection racket” in which EU companies need to buy carbon credits to continue operations, have now found themselves on the losing end of the reverse scheme.
In the final analysis, the winners are the European Union corporations willing to play hardball with the European Union Greenhouse Gas Emission Trading System, and the losers are the EU middle class workers that are held hostage in the scheme.”
Dan Denning On Dubai, Copenhagen, And The Stock Market
Dan Denning, author of “Bull Hunter” (Wiley, 2005), in the Daily Reckoning (Australia):
“The S&P 500 hit a 14-month high overnight. The conventional wisdom is that two news events are responsible. This is probably wrong. But let’s look at both events anyway and see what happened.
The first is that Abu Dhabi extended a $10 billion in financing to debt-distressed Dubai. Hossanah! Remember, Dubai is not Lehman. It’s Bear Stearns. It’s merely the reminder that there are lot of leveraged investors in the world who’ve used borrowed money to buy assets that aren’t very productive. They’ll get theirs soon enough.
The second bullish item is that ExxonMobil (NYSE:XOM) made a US$41 billion all stock bid for Houston-based natural gas company XTO. This sent Exxon shares down 4.4%. Thus the Dow’s rally was a bit tepid (XOM is a Dow component)……
Exxon is either getting a bigger foot in the U.S. natural gas market or hedging against cap-and-trade legislation, or both. We vote for both. No one is in a better position to know about the constraints on global oil production and discovery of new reserves than a major company like Exxon. And Exxon has seen firsthand that unconventional natural gas can be a lucrative little market.
But are those two bits of news really enough to send the market higher? Probably not. Who knows why the market goes higher? It does what it does. There’s an alternative explanation.
The alternative explanation is that the Copenhagen climate talks look like they’re collapsing into confusion and President Obama’s legislative agenda is in tatters. The private sector absolutely loves this…..
Good policy? Bad policy? Who knows? All we know is that the more uncertainty you introduce into the markets, the more conservative and defensive investors are going to get……
That’s not to say that a deal won’t come out of Copenhagen. Maybe the planet will be saved. Or maybe Copenhagen is the sell signal for global warming as a big idea/moral issue with which to bash the public. But either way, we reckon the stock market actually likes the idea that no climate deal is imminent and that healthcare legislation in the U.S. Senate can’t seem to get 60 votes.“
My Comment
Full disclosure: I worked for Agora two years ago. I receive no financial or other compensation ( trips, free food, passes to movies, restaurants, invites to exclusive seminars, commissions on real estate, insider deals etc. etc.) for mentioning them. But, if you´re writing about financial contrarians, they´re the original ones ….
My own difficulties with and criticism of them do not - and should not - prevent me from correctly attributing and acknowledging their work in populariazing nearly all the main issues that are now being debated in the media. Certainly, it was through them, and through Lew Rockwell, and Mises, not through establishment media or their blogs that I received an education in Austrian economics (I should add that I was always instinctively oriented to it, from childhood on).
Having deleted my facebook account after the social media wrestling-match between the Wall Street media mob (and backers) and Deep Capture´s investigative team (and backers), I am now content with actually writing emails or making phone calls to people I want to contact. Thankfully, there aren´t many I do.
SEC To Look At High-Frequency Trading and Naked Access
From Reuters, a report shows sharp rise in “naked access” to markets after 2005:
“NEW YORK (Reuters) - A report says that 38 percent of all U.S. stock trading is now done by firms that have “naked sponsored access” to markets, the controversial trading practice said to imperil the marketplace, and which faces a regulatory crackdown.
Naked access gives trading firms, using brokers’ licenses, unfetted access to stock markets. The firms, usually high-frequency traders, are then able to shave microseconds from the time it takes to trade.
Aite Group, a Boston consultancy, found that naked access accounted for just 9 percent in 2005.
The U.S. Securities and Exchange Commission is set to make changes to naked access and less risky forms of so-called sponsored access, when it releases a document expected next month.
The document is also expected to look more generally at high-frequency trading — where proprietary trading firms, brokers, and others use algorithms to make markets and profit from narrow market inefficiency.”
Rick Ackerman On the Deflationary Argument
“Our grasp of deflation’s logic began with the 1976 book, The Coming Deflation, by the late C.V. Myers, and continued with Davidson and Rees-Mogg’s The Great Reckoning. Although Myers’ work was obviously premature, the concepts it emphasized are timeless, particularly this one: “Ultimately, every penny of very debt must be paid – if not by the borrower, than by the lender.” This is the crux of the inflation vs. deflation debate, and because of the way Myers framed it, we’ve never had any doubt that the U.S. would eventually experience a catastrophic deflation. We were early in thinking the financial system would topple as a result of the allegedly “mild” recession of 1990-91 and its S&L crisis. In retrospect, it’s clear that we lacked the imagination to see that the huge amounts of Third World debt that threatened the global economy at the time were relative chump change compared to the galactic sums that Bush, Obama and the Federal Reserve have put into play in the last three years in hopes of saving the system.”
My Comment
I posted this to support my reiterated position that the recession cannot possibly be corrected as simply as advocates of the stimulus programs like to argue. It´s been in the making for more than a quarter of a century. Can a few months change everything so fast? I could be mistaken, but I don´t think so,…
I also posted the Ackerman piece to counter the establishment media spin that Nouriel Roubini was so much “ahead” of others in predicting the recession.
I call Roubini an establishment figure because of several things, including the fact that he does business with Larry Summers. Here is Roubini warning about housing in 2006...
He himself said the earliest he predicted the housing crash was in July and August 2006.
But by then, even a layman, like yours truly had already done that, and done it earlier - July 2005
And I was, at least in part, drawing on my reading of Mises. org, Lew Rockwell, and The Daily Reckoning, when I wrote the piece…which is where they spotted me on the web, and offered me a gig.
(As I said, I´m always walking into synchronicities in my life..)
Compare that with what other experts were saying in 2005, which is, there´s no housing bubble. That´s Ritholtz, by the way, who writes the excellent blog, The Big Picture (At least, Ritholtz also did say that housing was extended).
But then, in that same piece, Ritholtz also predicted that 2008 would be a good time to reenter the housing market. Oops. [Dec 12. On second thoughts, maybe oops isn´t really warranted. Housing may not have bottomed out everywhere, but I´ll bet you could have picked up good bargains in a few places in 2008]
That shows that you can have very good number-crunching skills, but then miss some of the…..dare I say it?…big picture.…because the big picture has nothing to do with number-crunching but with perspective
And that takes a knowledge of history…. and not simply economic history either. It takes a broader knowledge of the world than professional money-managers usually have.
Meanwhile, compared to Austro-libertarians (see those cited above in Ackerman´s post), Roubini was some twenty-five years late in his analysis.
Yet the media studiously ignores Austrian theory and Austrian theorists (Mark Thornton, for example, called the housing bubble exactly on time and called gold $1200 back in 2005) and stamps approval on people who were either late or wrong…and turns to them for solutions.
Why is all that important? Because it shows the intellectual dishonesty that is at the heart of the corruption of the system. Fraud and force go together, and for political and financial fraud to succeed, they need intellectual and academic fraud to cover their sins… and prep the soil.
Deep lack of trust of anyone who adheres to a rival political theory (or to a rival political party)…. and the arrogance of power…lead the establishment media to rewrite history…. and this intellectual dishonesty is the rag behind which the emperor (the state) hides his moral nudity.
Open Letter To The Secretary-General Of UN
Wednesday, December 9th 2009, 2:07 AM ESTCo2sceptic (Site Admin)Dear Secretary-General,
Climate change science is in a period of ‘negative discovery’ - the more we learn about this exceptionally complex and rapidly evolving field the more we realize how little we know. Truly, the science is NOT settled.
Therefore, there is no sound reason to impose expensive and restrictive public policy decisions on the peoples of the Earth without first providing convincing evidence that human activities are causing dangerous climate change beyond that resulting from natural causes. Before any precipitate action is taken, we must have solid observational data demonstrating that recent changes in climate differ substantially from changes observed in the past and are well in excess of normal variations caused by solar cycles, ocean currents, changes in the Earth’s orbital parameters and other natural phenomena.
We the undersigned, being qualified in climate-related scientific disciplines, challenge the UNFCCC and supporters of the United Nations Climate Change Conference to produce convincing OBSERVATIONAL EVIDENCE for their claims of dangerous human-caused global warming and other changes in climate. Projections of possible future scenarios from unproven computer models of climate are not acceptable substitutes for real world data obtained through unbiased and rigorous scientific investigation.
Specifically, we challenge supporters of the hypothesis of dangerous human-caused climate change to demonstrate that:Variations in global climate in the last hundred years are significantly outside the natural range experienced in previous centuries;
Humanity’s emissions of carbon dioxide and other ‘greenhouse gases’ (GHG) are having a dangerous impact on global climate;
Computer-based models can meaningfully replicate the impact of all of the natural factors that may significantly influence climate…”
For the rest of the post and the complete list of signatories, see Climate realists.
China Warns of Gold Bubble
The Telegraph reports that China warns of a gold bubble:
“Experts say that China is putting a floor under the gold price but does not chase rallies once they are under way.
There is also a double-edged twist to news that Barrick Gold, the world’s biggest gold mining company, has closed the final 3m ounces of its notorious hedge book ahead of schedule. While the move is a bet that prices will continue to rise, it also means that Barrick has been a big buyer of gold lately. These purchases have now stopped. One of the key drivers behind the spike this autumn has been removed.”
This article is one of the few out there that takes into account the time lag between an announcement and an action. Many of the events that reporters tout as proof that the gold price will spike much higher right way are actually events that have taken place in the past - for eg., purchases at lower prices - or are hedges that have a more complex function than the usual retail investor has in mind, with the siren call of “gold´s going to the moon, jump in now or you´ve lost it forever” sounding in his ears.
Take trader John Paulson´gold purchase. It took place in January, apparently. And remember that it was a position taken by his hedge-fund, with his clients money. Paulson gets his fee no matter how that trade turns out long term,
and if his fee is a percentage of the assets under management, a purchase when the price is high is better than one at rock bottom, even if his clients´profits are not maximized that way.(sorry: thoughtless blunder there)Notice finally that Paulson´s own fortune is in gold to a much lesser extent - only about $250 million of his reported $6 billion net worth. That comes to about 4% of his assets….(Correction: that´s 6.8 billion and less than 4%)
Not an earth shaking proportion by any means.
So, what gives?
Muslims Should Withdraw Money from Swiss Banks..
“Turkish State Minister and Chief Negotiator for EU talks Egemen Bagis has urged Muslim nations to withdraw their money from Swiss banks.
Bagis’ comments came in response to a recently approved ban on the construction of new minarets in Switzerland.
Following a weekend referendum, the construction of any new minaret was declared illegal in Switzerland, a move which drew sharp criticism from Muslim and European countries, as well as the UN and the Vatican.”
Paulson Has More Gold Than Australia…
Or Argentina, or Brazil, or Thailand, or Ireland…or..
Check out EconomPic for a nice chart.
More Fall Out From Dubai On Indian Market
“Segments of the economy such as consumer durable and core industrial growth that are driving the current recovery in the Indian economy are purely a function of domestic stimulus initiatives and remain to that extent relatively insulated,” HDFC Bank said in a report today.
However, areas such as exports, remittance, banking and construction as well as real estate are likely to see further damage, the report added.
Exports are going to be the most affected by Dubai woes, as the UAE region is now India’s largest export destination toppling the United States.
Besides, bullion trading in Dubai is likely to be impacted, which may have ripple effect for India as around $29 billion of gold from the country is being traded in Dubai.”
Madoff -Related Accounting Firm Does Dubai´s Accounts..
From the Independent:
“Dubai World will start a formal process next week that will see it invite leading banks, including HSBC, Royal Bank of Scotland (RBS), Lloyd’s Banking Group and Standard Chartered, to create a steering committee to represent the many lenders. KPMG has been lined up by the lead banks to represent them in negotiations, with a formal appointment expected once the compilation of the five-to-six bank steering committee is finalised.
My Comment:
Now, KPMG is the big four accounting firm that gave Madoff´s representations to Tremont Group Holdings (a US fund that Madoff purportedly hoodwinked) a thumbs up. The Tomchin Family Charitable Trust, one of numbers of investors who were allegedly scammed by Madoff, has launched a lawsuit against KPMG and Tremont for negligence in monitoring one of Tremont´s funds that invested with Madoff.
The lawsuit included a list of other Madoff clients that included Victoria de Rothschild of the banking family of the Rothschilds and a Tory party contributor:
“Also on the list of Mr Madoff’s British clients is Lady Victoria de Rothschild, who is related to Nathaniel Rothschild, the co- chairman of Atticus Capital, the hedge fund.
Lady Victoria is a well-known figure on the society circuit and became known more recently as a lender to the Tory party, having set up a special company that gave the party a £1,014,000 loan that is due to be repaid in 2010.”
KPMG has also been hit with a $1b lawsuit for “reckless and negligent” auditing of failed subprime broker, New Century Financial, reportedly the first major case against an auditor arising from the financial crisis.
My Comment
So we have a Madoff-tainted accounting firm KPMG, with multiple legal problems, representing the banks that loaned to Dubai on one side, and (as I noted before) French banking legend Rothschild on the other side, heading up the restructuring efforts for Dubai….
Wiki has a list of KPMG´s legal infractions that includes this:
“In February 2007 KPMG Germany was investigated for ignoring questionable payments in the Siemens bribery case.[29] (Siemens agreed to pay a record $1.34 billion in fines to settle the case in December, 2008.) In November 2008 the Siemens Supervisory Board recommended changing auditors from KPMG to Ernst & Young.[30]
In 2006, Fannie Mae sued KPMG for malpractice for approving years of erroneous financial statements.[31]
In March 2008 KPMG was accused of enabling “improper and imprudent practices” at New Century Financial, a failed mortgage company[32] and KPMG agreed to pay $80 million to settle suits from Xerox shareholders over manipulated earnings reports.”
Some confidence-builder… a bank that´s been closely connected to the Madoff scam and to the Fannie and Freddie case (and hence, to Goldman Sachs)…
KPMG and Deloitte were brought in to investigate India´s ¨Madoff¨” - the fraud- riddled IT outsourcing giant Satyam (now Mahindra Satyam, its post-merger avatar - over the objections of the Institute of Chartered Accountants, India´s regulator, which said KPMG was not registered with it and would thus not be subject to its code of conduct or disciplinary proceedings.
Dubai Government Thumbs Its Nose at Creditors
After tentatively implying that there would be a back-stop to Dubai World´s debt problems, the Dubai Government on Monday disowned any legal obligation to Dubai World and told creditors that they needed to take responsibility for their loans.
“Creditors need to take part of the responsibility for their decision to lend to the companies,” said Abdulrahman al-Saleh, director general of Dubai’s department of finance. “They think Dubai World is part of the goverment, which is not correct.”
My Comment:
What´s going on here? The back and forth isn´t recent, but has been going on the whole year, with Dubai implying at one time that its debt load was taken care of, and at another, that it still had more problems; and in this instance, first seeming to back up Dubai World and then, backing-off from its backup….
The timing and vacillation seem to suggest that the government is testing the market and the reaction of investors before making its move. Not good.
And it leaves open the possibility, already raised by UBS in a recent Bloomberg piece, that the problems exceed the $80 billions of government liabilities and might extend to off-book structures that are not presently known.
Update:
After weekend assurances from Dubai that its much richer fellow-emirate Abu Dhabi, seat of the UAE federal government, would help, and that liquidity would be assured for local and international banks that needed it (through a “special additional liquidity facility”), Asian markets recovered this morning from their sell-off last week. But this morning, the local stock exchanges have been hit hard and this new announcement could provoke a second sell-off in world markets, especially in the UK FTSE, since British banks, especially Royal Bank of Scotland, have loan exposure to Dubai World.
Then, there´s also the exposure that UK banks have to other investments where Dubai World holds a stake.
And there´s the indirect exposure US banks have to Dubai through ties with UK banks.
India Fears Effects of Dubai Meltdown
After earlier assurances that the Dubai meltdown wouldn´t impact the Indian market much, top officials now admit in published reports that the Indian labor market could be affected.
“Annual remittances to India from UAE is about 2 billion US dollars, out of the $52 billion sent by Indian expats from across the world.Two-thirds of the six million people living in Dubai are Indians, more than 60 per cent of them Malayalis, much to the worry of Kerala’s Finance Minister T M Thomas Isaac.“One main fear,” he notes, “is that the credit to realty sector in Dubai would be frozen for some time. It could seriously affect the construction sector, thereby our workers.” There is also concern about the fate of Kochi’s Smart City project as the Dubai-based real estate giant TECOM is already alleged to be in a bad shape.Most of the Indians employed in the UAE, according to recruitment agencies, are in the real estate sector, financial services and retail.“The Middle East meltdown,” says E Balaji of Chennai-based headhunting firm Ma Foi Management Consultants, “will lead to at least 25 per cent contraction in the job market. It can have a ripple effect.”
My Comment:
I´m assuming that the job market refered to is the job market for Indians in the Middle East….
Meanwhile, the rupee has come under pressure as the Indian stock market sold off on the events in Dubai.
Rothschild Helps Dubai Put Assets On Auction Block
From The Daily Telegraph:
“Paul Reynolds, head of Rothschild’s advisory operations in the Middle East, was this week asked to work for the Dubai government’s chief restructuring officer alongside Aidan Birkett of Deloitte, who was appointed on Wednesday.
The team is tasked with assessing the group’s assets, which is likely to result in a large scale sell-off of assets as varied as the QE2 cruise liner; Turnberry, the golf course that hosted this year’s Open Championship; and a raft of properties.”
My Comment:
This was the first I´d read about Rothschild´s involvement in Dubai, but it turns out Rothschild has been advising Dubai about the potential bankruptcy of Dubai World and its subsidiary Nakheel for a while. The advice is in connection with the bond issue to funnel money to Nakheel through something called the FSF (Financial Support Fund), which will apply certain tests (equivalent to the US “stress” tests) to pick and choose which of Dubai World´s operations will qualify.
“Those seeking FSF cash will have to demonstrate they have a long-term plan for financial and commercial viability, not least because the cash will have to be repaid, probably within a three- to five-year time frame. …..
It is worth noting, too, that the Dubai financial sector appears to fall outside the Rothschild guideline of FSF eligibility. Although they are obviously a key part of ongoing economic development, the emirate’s banks are generally regarded as being in a comparatively healthy condition, well-capitalised and with acceptable levels of non-performing loans. But whether the Rothschild strategy would allow a big financial institution with a high real-estate exposure to qualify for FSF funding is open to debate.”
More at Global Reearch.
What´s interesting is that Dubai World´s real estate assets wouldn´t qualify, which means that a lot of expensive real estate, some of it in New York and London, is likely to be on sale for cheap, although Dubai itself is stating that it will not allow itself to be forced to sell its prize assets at what it considers unfair prices.
Now with Dubai´s own property prices already down 50-60% from their 2008 peaks (with another 20% to go), what´s a firesale in London or New York property going to do to prices already showing signs of entering the famous second dip?
The Culture of “Da Boyz”
In a piece on Pamela Martens, the former Wall Street whistle blower, who last year unearthed the black box of Markit, as well as the Primex dark pool, Stephen Metcalf discloses the culture of “da boyz.”
Whistle-blower´s Grim Tale, Stephen Metcalf, The Observer, December 1, 2002
“The secret to Wall Street’s systemic chauvinism is simple: The Street is insulated against litigation and bad publicity. All employees at the major investment banks must sign a mandatory arbitration clause, effectively giving away their right to sue their employer. Claims are adjudicated in what amounts to an industry-controlled private justice system, by arbitration panels staffed overwhelmingly by white males in their 50’s and 60’s. In mandatory arbitration, no depositions are made public, and awards have ironclad gag provisions. So Wall Street can continue to smile, and smile, and be a villain. One anecdote in particular conveys the full horror of the situation. When two female Smith Barney employees complained of strikingly similar episodes involving a male co-worker, in which the man forced himself on them physically, the firm waited four years before conducting a hearing. “A week before the hearing,” Ms. Antilla writes, Smith Barney “forced the two women to undergo examinations by a psychiatrist of the brokerage firm’s choosing.” One of the women was subjected to a Gulag-quality interrogation. The grilling included “questions about her sex life, the opening of her gynecological records, and queries about her menstrual periods, her marital counseling, and her divorce. The psychiatrist even had copies of her therapy records.” The woman finally broke down when the psychiatrist asked her to recite in reverse order the names of the U.S. Presidents.”
Mark to “Markit” Manipulation
From Deep Capture:
“Another line of inquiry has not been pursued, however, though it is of equal, and perhaps greater, significance. That line of inquiry concerns the way in which the prices of credit default swaps effect [sic] the perceived value of all forms of debt — corporate bonds, commercial mortgages, home mortgages, and collateralized debt obligations — and as a result, the ability of hedge funds manipulators to use credit default swaps to enhance their bear raids on public companies.
If short sellers can manipulate the price of credit default swaps, they can disrupt those companies whose debt is insured by the credit default swaps whose prices are manipulated. The game plan runs as follows: find a company that relies on a layer of debt that is both permanent, and which rolls over frequently (most financial firms fit this description). Short sell that company’s stock. Then manipulate the price of the CDS upwards, preferably into a spike, as you spread the news of the skyrocketing CDS price (perhaps with the cooperation of compliant journalists at, say, CNBC).
Because the CDS is, in essence, an insurance policy on the debt of the company, the spiking CDS pricing will cause the company’s lenders to panic and cut off access to credit. As this happens, the company’s stock will nosedive, thereby cutting off access to equity capital. Thus suddenly deprived of credit and equity, the firm collapses, and the hedge fund collects on its short bets.
Moreover, credit default swap prices are the primary inputs for important indices (such as the CMBX and the ABX) measuring the movement of the overall market for commercial and home mortgages. In the months leading up to the financial crisis of 2008, short sellers pointed to these indices in order to argue that investment banks – most notably Bear Stearns and Lehman Brothers – had overvalued the mortgage debt and property on their books. Meanwhile, several hedge funds made billions in profits betting that those indexes would drop.
It should therefore be a matter of some concern that credit default swap “prices” and the indexes derived from them are determined almost entirely by a little company with zero transparency and, it appears probable, a high exposure to influence from market manipulators. The company is called Markit Group, and there is every reason to believe that its CDS-driven indices (the CMBX, the ABX, and several others) are inaccurate, while the credit default swap “prices” that they publish and which rock the market are in fact nowhere close to the prices at which credit default swaps actually trade.
Last year, the media reported that New York Attorney General Andrew Cuomo had sent subpoenas to Markit Group as part of an investigation into possible manipulation of credit default swap prices by short sellers. This investigation, like Mr. Cuomo’s other investigations into market manipulation, have yielded no prosecutions.
The Department of Justice is reportedly investigating Markit Group for anti-trust violations. This investigation (which is reportedly focused on how Markit Group packages and sells its information) seems to acknowledge that Market Group has near-monopolistic control of information about credit default swap prices. However, if the press reports are correct, the DOJ has not considered the possible appeal of this monopolistic control to market manipulation.
“
My Comment
This isn’t the first time that Markit has been fingered. Pam Martens wrote a detailed piece last year at Counterpunch called “How Wall Street Blew Itself Up” that blew Markit´s cover.
Now I´ve always suspected the indices (including Libor) are manipulated. The fundamental problem in our markets is corruption..and that´s directly related to size and monopoly. That´s why you do need certain kinds of “level playing field” or procedural types of regulation (not substantive regulation) to take care of the problem. I think this should also take care of Olagues’ caveat. The Deep Capture team isn’t confining its investigation to simply naked shortselling in the technical sense, but is expanding its work to the entire range of strategies involved in rigging the markets - insider trading, short-selling of all kinds, and the manipulation of indices. (Correction: I am referring to uncovered short sales, where there is no intent to deliver)
Deadbeat Expats Flee Sharia Crackdown on Debtors
Foreign workers lured by the promise of easy living and credit are turning tail and choosing to leg it, rather than face Dubai´s tough Sharia law which mandates prison for debtors [not a bad idea in some cases...]:
“Now, faced with crippling debts as a result of their high living and Dubai’s fading fortunes, many expatriates are abandoning their cars at the airport and fleeing home rather than risk jail for defaulting on loans.
Police have found more than 3,000 cars outside Dubai’s international airport in recent months. Most of the cars – four-wheel drives, saloons and “a few” Mercedes – had keys left in the ignition.
Some had used-to-the-limit credit cards in the glove box. Others had notes of apology attached to the windscreen.”
Abu Dhabi Agrees to Selective Bail Out
“We will look at Dubai’s commitments and approach them on a case-by-case basis,” the official told the Reuters news agency by telephone, adding: “It does not mean that Abu Dhabi will underwrite all of their debt.” Al Jazeera, November 28, 2009
An unnamed Abu Dhabi official has said that the rich UAE [United Arab Republic] emirate will help its spendthrift neigbour Dubai on a case by case basis.
This gets pretty interesting for all the other countries out there with sovereign debt problems .. even though, as I blogged earlier, Dubai´s is not a sovereign debt problem. It´s a problem for Dubai World.
However, there seems to be a perception issue involved, which is causing credit default swaps for Irish banks to rise dramatically.
What´s going on?
This isn´t the first time the Dubai story has caused jitters in the market. Ten months ago, Dubai CDS´s rose to record levels on fears that neighboring and much richer Abu Dhabi wouldn¨t ride in to the rescue.
But that was Dubai CDS. Now it´s Irish CDS´s that are up.Over at the Baseline Scenario, Simon Johnson has an explanation. He says the Irish tremors are caused by the perception that as Dubai goes, so go the other sovereign debt crises around the world:
1. If Dubai can effectively default or reschedule its debts without disrupting the global economy, then others can do the same.
2. If Abu Dhabi takes a tough line and doesn’t destabilize markets, others (e.g., the EU) will be tempted to do the same (i.e., for Ireland and Greece). “No more unconditional bailouts” is an appealing refrain in many capitals.
3. If the US supports some creditor losses for Dubai (e.g., because of its connections with Iran), this makes it easier to impose losses on creditors elsewhere (even perhaps where IMF programs are in place, such as Eastern Europe).I´m not sure I follow this reasoning at all. Nor do I understand why Mr. Johnson seems to think this adds up to strengthening Ben Bernanke´s hand…..
Let´s see. Is Mr. Johnson saying that if picking and choosing whom to rescue is OK for an Arab sheikh, it should be good enough for Ben Bernanke?
Frankly, that sounds less like an explanation and more like advance PR for the Fed to engage in arbitrary treatment - bailouts - of banks and other companies..
[Update: And lo, it turns out that Ben Bernanke does need all the help he can get. He wants his power, dammit...see this oped at the Washington Post, hat tip to EconomicPolicyJournal]
A more convincing explanation of the Irish reaction than Johnson´s is Irish exposure via investment and employment to the Dubai economy.
“The Emirate was a Mecca for the Irish glitterati during the Celtic Tiger years, with many would-be investors taking a gamble. Ireland captain O’Driscoll bought an apartment in the e389million Tiara Residence in 2006 off the plans. However, the property may now be worth much less than the €500,000 he paid for it.
But thousands of Irish investors are facing the prospect of their Dubai prop-erties plunging in price. Price drops in Dubai have been severe. According to Knight Frank Global House Price Survey, prices dropped by 40%.
It’s all a long way from the glittering heights of the middle of the decade - and from the 1980s, before the ruling Al-Maktoum family decided to turn their dusty emirates into a leading city.
The Irish have shaped the landscape of Dubai like few other nationalities, with Irish builders, engineers and architects prominent in building up the city state.
But now, question marks hang over the fate of hundreds of Irish who escaped the slump at home for jobs with companies under Dubai’s control.”
More here.
John Olagues on Naked Short Selling
John Olagues, the options market-maker who first analyzed the collapse of Bear Stearns and Lehman as the result of a concerted attack, has a new piece at Investopedia criticizing the ¨naked short selling¨critics:
Naked short selling is often in the news today, and is criticized by journalists and other pundits who claim that naked short sellers allied with “rumor mongers” caused the collapse of Bear Stearns and Lehman Brothers. They cite the large “failure to deliver” for a stock as evidence of naked short sales days after the stock had dropped. Although the naked short sales happened after the collapse event, they still hold onto the idea that those after-the-event naked short sales caused the collapses. (To learn more, see Case Study: The Collapse Of Lehman Brothers.)
In my opinion, those who believe that naked short sales caused the collapse of Bear Stearns and Lehman Brothers are misdirecting the attention from the illegal inside traders and their allied manipulators.
The large volumes of “fail to deliver” stock and the naked short sales after the collapses of Bear Stearns and Lehman Brothers leads me to believe there is an explanation for those large volumes. However, that strategy did not cause the collapse of those companies. (For more, check out our Short Selling Tutorial.)
The Bottom Line
Selling short can be done in a myriad of ways. And, although naked short selling is often given a bad reputation in the media because it is frequently abused, it is not as nefarious as its critics suggest.
My Comment:
I´ve gone back and forth about this with Olagues, as well as with the most prominent figure in the naked short-selling campaign, Patrick Byrne…and it occurs to me that a lot of the problem lies in language - as is the case in other areas of political debate too.
Distinguishing between naked shortselling and other forms of shortselling where the shares fail to deliver seems to the source of the problem. NSS should include within it all forms of shortselling that do not cost the seller.
When the seller does not pay the actual price for his transaction, his activity is no longer adding information to the market. There is no price discovery, because the cost of the shortselling has been arbitrarily shifted elsewhere and in fact miscues the market. So what market-makers do in the course of their legitimate activities and also when they´re trying to exploit their position for their own benefit would come under the NSS rubric..
Aside:
I would go on..but I have had computer problems for the past two weeks…the keys type whatever they want to …I cant use the apostrophe, the parentheses have vanished, and when I type a dash, out comes an equals sign….which is why I keep using dots..and there are no contractions.Fall-Out from Dubai World (Update)
I´ll try rounding up the reaction in the market and the punditry to Dubai World´s threat of default.
Two clarifications.
First: Dubai World´s problem is being referred to as a sovereign debt problem, but as far as I can understand, it´s not. The Dubai government is the 100% owner of Dubai World, which is itself a holding company. But, as William Buiter points out in the Financial Times, the Dubai government has only limited liability, just like any other limited liability company.
It wouldn´t have to reach into its pockets to make good any obligation unmet by Dubai World or its subsidiary Nakheel.
Second. The debt crisis is being referred to as a Black Swan. Again, this is inaccurate. A black swan is an unexpected event that doesn´t fit (and in fact upends) the prevailing paradigm. This debt crisis has been on the horizon for a while. And the announcement of the standstill in payment was obviously calculated to roil the markets as little as possible - being made during the Thanksgiving holidays, when the market is partially shut, and also at the start of Eid which lasts until December 6.
Update: With those caveats, I was going to try and list the banks and sectors that might be affected…but I found that Bob Wenzel´s site had already got a chart of Dubai World´s obligations to Nakheel Holdings from Izabella Kaminska at the Financial Times. You definitely need your coffee before you read this one.
However, the text below the chart, although just as abstruse, does make it clear that investors are not going to be able to get any blood out of the Dubai government.
“Investors should note, however, that the Government of Dubai does not guarantee any indebtedness or any other liability of Dubai World.”
Update: I should add here that while technically the government of Dubai is not responsible for the debt, it is implied everywhere that the safety of the debt derives from its backstopping by the government. The reaction of furious investors that Dubai would never be able to raise a penny again implies that default would taint the government and not simply the company.
Speculation Drives Metal Prices
Geologist Brent Cook at Mineweb explores the speculative frenzy behind metal prices:
“Now I do not know if Paul’s [Van Eeden] thesis on gold is accurate or not: if it is it could still take many years to play out. Likewise, I do not know how or when the base metal prices will re-equilibrate to the reality of end demand-whatever that is. What is obvious is that gold and now base metals have become speculative investments that in addition to being bought as hedges against inflation and a falling US dollar are the latest get rich quick scheme. The end result is that absent the faith that metals and markets are all headed higher, we here at Exploration Insights are finding it difficult, although not impossible, to find value in junior mining and exploration companies.
Hot money on the other hand is not.
Over the past few months we have witnessed bought-deal equity financings for individual mid- to junior tier gold companies in the 10’s to 100’s of million dollars. These are being bought at nearly the absolute 52-week highs by funds that I know have not looked into the mining, metallurgical, social or political intricacies that make or break a mine. This fearless hot money jumping into the sector worries me. It always precedes a market bubble and correction: sometimes serious, sometimes temporary- sometimes by weeks, sometimes by years.
Adding to the absence of fear and proper due diligence in the market, my recent discussions with corporate financiers confirm that both large and mid-sized gold companies are being offered substantial unsolicited bought-deal financings-no questions asked. At the same time, some of the very same companies being offered the quick money are being hit with heavy selling when a fund manager becomes “concerned” because there has been no news for a couple of weeks or gold backed off $15.
Hand in hand with heavy fund demand for new metals investment ideas most of the major research firms have increased their commodity price assumptions to reflect the “new reality”. The primary advantage afforded by the commodity price revisions is that previously overvalued mining companies can instantly become “Buys”. Recall that the last major upward revisions from many of these same research firms came as the new reality of higher prices set in 2008.
The problem is that greed is driving the market and so any small hiccup or change in sentiment and the hot money tends to bolt. As last year taught us (remember last year?) when the fast money going in is the liquidity, there ain’t no liquidity getting out.
I remain cautious and somewhat concerned by what appears to be hot and fickle money jumping into a sector that is apparently taking its cue from pig farmers”.
Secy of IMF - Siddharth Tiwari
On November 21 an Indian was named Secretary of the IMF, according to Press Trust of India:
“With a proven track record in managing complex work programmes, Indian economist Siddharth Tiwari has been named as the Secretary of the IMF by its Managing Director Dominique Strauss-Kahn.
Tiwari, currently Director of the Office of Budget and Planning, is set to assume the position, which was held by Shailendra Anjaria before his retirement from the IMF earlier this year.
“Mr Tiwari has the experience and skills” to promote consensus building, which is a critical goal of the IMF Board and Management, Strauss-Kahn said in a statement.”
SEC Chief Khuzami On Muckety
Former federal prosecutor and Deutsche Bank general counsel Robert Khuzami was appointed chief of the SEC on March 30, 2009. Here’s his bio.
Billionaire Nabbed In Largest Hedge Insider Scheme
In the news (:http://www.bloomberg.com/apps/news?pid=20601087&sid=asliefsvW5Zc)
“Oct. 16 (Bloomberg) — Raj Rajaratnam, the billionaire founder of Galleon Group, and ex-directors at a Bear Stearns Cos. hedge fund were among six people charged in a $20 million insider trading scheme federal prosecutors called the biggest ever involving hedge funds.
Also accused were Rajiv Goel, who worked at Intel Capital as a director in strategic investments, Anil Kumar, who worked as a director at McKinsey & Co., and IBM Corp. executive Robert Moffat. The former officials at Bear Stearns Asset Management are Danielle Chiesi and Mark Kurland, who were affiliated with the firm’s New Castle Partners, which managed about $1 billion.
“The defendants operated in a world of, you scratch my back, I’ll scratch your back,” U.S. Attorney Preet Bharara in Manhattan said at a press conference today. “Greed, sometimes, is not good.”
My Comment
The biggest hedge scam - there you go. Anything Westerners can do, Easterners can do better. We’re not going to settle for any penny-ante crime anymore. Now you know how at least one South Asian billionaire got rich so fast. Nothing like having an edge…
What’s interesting is that this is the first time that the Fed’s used wire-tapping to target insider trading on Wall Street. Until now that tool has been the reserve of organized crime and drug cases.
Fraud On the Run: Goldman Cop On SEC Beat (ROTFLOL)
In the news, to be filed under - What parallel universe does New York live in?:
“Oct. 16 (Bloomberg) — The U.S. Securities and Exchange Commission named Adam Storch, a 29-year-old from Goldman Sachs Group Inc.’s business intelligence unit, as the enforcement division’s first chief operating officer.
Storch, who joined the SEC Oct. 13, was named to the newly created post of managing executive in the enforcement unit, charged with making the division more efficient, the SEC said today in a statement. At New York-based Goldman Sachs, he had worked since 2004 in a unit at that reviewed contracts and transactions for signs of fraud.”
My Comment:
Personally, I’ve come to nurse a kind of contemptuous respect for, an appalled amusement at Goldman Sachs. It’s the contrarian in me.
In-your-face-corrupt, shameless, self-promoting, out-of-touch, sanctimonious, and bottomlessly greedy - It’s a firm made for our times…
If Goldman Sachs didn’t exist, we’d have to invent it.
Mid-East, Europe, Africa Securitizations Will Deteriorate More, Says Moody’s
From the Global Arab Network:
“The performance of many asset classes in the Europe, Middle East and Africa (EMEA) securitisation sector will continue to deteriorate throughout the rest of the year and into 2011, says Moody’s Investors Service in a new Special Report. The report examines the prospects of recovery for international securitisation in several asset classes and geographies: EMEA Auto ABS, UK Credit Card ABS, UK Non-Conforming RMBS, Spanish ABS and RMBS, Asia Pacific ABS and Global Derivatives. The rating agency expects performance volatility and uncertainty to decline in the coming months, although it cautions that a drop is predicated on achieving some level of economic moderation if not slight improvement, combined with the seasoning of securitised loan portfolios.
Moody’s says that although GDP growth is expected to turn positive in many countries in EMEA later this year or in early 2010, employment and home prices will continue to deteriorate well into 2010, which will lead to securitised loan losses remaining at elevated levels throughout 2011 and 2012.”
Ron Paul: Fractional Banking Finances War…
*”Paul makes it clear that the Fed isn’t the whole problem. It’s just one part of a system that first went wrong with the introduction of fractional reserve banking centuries ago (banks used to be warehouses, storing depositors’ money for a fee), followed by the spread of European central banks (really just scams to allow a few elite bankers and politicians to expand their own power at the expense of everyone else) and then, finally, the introduction of fiat currency, which freed governments to expand spending and borrowing without regard to, well, anything. The problem, in short, is the whole of modern banking and finance.
*The middle part of the book features transcripts of Congressman Paul grilling Fed chairmen Greenspan and Bernanke. Some of these transcripts date back to the early Reagan era, which means that for going on three decades Paul has been fighting this fight, and slamming into the same brick wall. The Chairmen feel no need to explain themselves to a lowly congressman, and respond with a mixture of lies and obfuscation that apparently fooled most of Washington. The generally-respectful Paul even refers to Greenspan as “pathetic” after one especially dishonest piece of testimony. Less charitable readers will, by the end of this section, want to take a congressional microphone and beat Greenspan and Bernanke senseless.
*Fractional reserve banking and fiat currency make war easier. Back when a ruler needed actual gold to field an army, invading a neighbor required some serious forethought. But once a dictator (or the world’s policeman) could just print a few billion pieces of paper and order some new tanks, “defending the national interest” got a whole lot easier. Hence the bloodbath of the 20th century, and perhaps the mess of the coming decade.
*Paul knows all the major sound money/Austrian economics classics, and he cites them liberally. The “recommended reading” list contains a year’s worth of serious research.
*Though he continues to fight, he’s not optimistic about averting the coming train wreck, which he refers to as the “BIG ONE”.
Gulf Arabs to Move Out of Petro-Dollar (Updated)
Update:
I’m adding my comment at the top here after watching this puzzling day. Gold shot up to new highs over $1040 (and not just in the US but elsewhere). Is this the bull break-out the bugs have been waiting for? Maybe. Central bankers and officials from the Gulf states came out to pooh-pooh the story, but it couldn’t be put back in the box.
My puzzlement is this: If gold is soaring because of this “revelation” of the dollar’s death - then why did the dollar itself sink only modestly (at least, as I write).
I note also that the stock market recovered some of its ground. That might have something to do with the Australian Reserve Bank announcing a tighter policy, quite unexpectedly, and in apparent belief that the recovery is real, never mind Joseph Stiglitz, George Soros, Marc Faber, Jim Rogers, and other no-longer-strange bedfellows who think the opposite.
V-shaped, U-shaped, Square-root shaped, or corkscrewed, the recovery isn’t your grandfather’s recovery, that’s for sure. And someone is trying to make a silk purse out of this sow’s ear. That skepticism leads me to wonder whether this very convenient rumor, which coincides with the IMF meeting in Istanbul, might be a certain kind of saber rattling in anticipation of negotiations - except that these very public meetings are never where anything substantial takes place any way. (So says Simon Johnson in a recent blog post). But the IMF is selling gold, we know, and we know also that it wants to make sure it doesn’t hit the markets too hard when it does. Could this little upswing be helpful toward that end? Probably. Could this rumor - widely denounced as insubstantial - have something to do with that? Perhaps.
In the news, the Independent’s Robert Fisk reports on the coming fall of the petro-dollar:
“In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.
The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.”
What A Billionaire Can Buy
For those who think that nationalism is the threat, rather than transnationalism, consider this:
“Bill Gates, America’s richest man with a net worth of $50 billion, has a personal balance sheet larger than the gross domestic product (GDP) of 140 countries, including Costa Rica, El Salvador, Bolivia and Uruguay. The Microsoft ( MSFT - news - people ) visionary’s nest egg is just short of the GDP of Tanzania and Burma.”
More here at Forbes.
Prechter - Debt Is the Problem, Not Paper Printing
Goldseek radio has an interview with Robert Prechter here.
Prechter’s 2002 book, “Conquer the Crash,” predicted the current economic collapse and this is an interesting and wide-ranging interview. Prechter is a renowned Elliot Wave theorist and a long-time prophet of depression.
Summing up his most important points:
*We have been in a developing deflation since 2002
*Debt is the problem, not paper-printing.
*Gold will hold value and do well, but it won’t go to the moon
*Cash is a good place to be
*The market will go down for a replay of 2008, in spades
Faber: Indian Central Bank One of the Best in the World
“Where does India fit in your preferred or not preferred list right now of markets?
A: I think the Reserve Bank of India (RBI) has one of the best monetary policies in the world because they supervise the financial sector very closely. They have maintained relatively tight monetary policies and also they pay attention not only to core inflation which is not representative of the cost of living increase and is not representative of inflation in the system but the RBI also pays attention to rising and falling asset prices. So I have to give them credit for being one of the best Central Banks in the world.
My Comment:
Faber goes on to argue for a pull-back in markets everywhere (maybe immediately, maybe after a further 10% rise), for a snap-back of the dollar in the near term (by around 10%), and for substantial further decline in the market, and over the next 2-3 years, in the dollar.
I like the point he makes in the quote that inflation isn’t just “core” inflation - the rise in prices in the stuff on the grocery shelves - but should also include asset price inflation. Because then you’d have a better judgment of what was going on in the markets.
My own take is that the media is misjudging some of the numbers coming from the emerging markets. The Chinese figures are likely to be highly over-optimistic and inflated, maybe by as much as 50% or more. The Indian market is also not that transparent….
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