LILA RAJIVA: The Mind-Body Politic
Individuals Not Ideologies
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Financial Crisis Inquiry Commission Chair Berates Lloyd Blankfein
“It sounds like selling a car with faulty brakes and then buying an insurance policy” on the driver,”
– Financial Crisis Inquiry Commission Chairman Phil Angelides (D) to Goldman Sachs CEO Lloyd Blankfein.
Well, well, well,
Doesn’t sound too different from what we said in September 2008, does it? (more…)
Wall Street: The Crematory Of Capitalism
“Independent traders know as a fact that Humungous Bank & Broker (HB&B) research analysts are biased and unaccountable. We also know they give short-term tips to their firm’s proprietary traders and sales people that are at odds with their longer-term published opinions. These unfair practices are permitted because the fundamental conflict of interest structure of the securities industry is permitted.
Today the Wall St Journal has reported that FINRA (the Financial Industry Regulatory Authority) has launched a broad inquiry into how up to a dozen Wall Street firms disseminate stock ratings and research. Important questions are being asked.
On August 24 this year, WSJ informed the public of how Goldman Sachs analysts were tipping their traders with info that differed from published reports. These regular meetings were called “trading huddles”. At the time, I called it insider trading, which is criminal.”
My Comment:
A reader commented earlier that “insider trading” is a big yawn as a story (for the latest insider trading arrest, see this case, of an ex-banker from Lazard, a relatively small case, admittedly)
Someone might come to that conclusion only if their knowledge of the practice were abstract and based on theoretical debate on the subject. But anyone who knows the history of the capital markets over the last 30 years or so knows that a big part of the story is that investment (merchant) banks turned into traders by the end of the century and that their proprietary trading became more important to them than their retail clients or customers. I’ve written about this in relation to Goldman Sachs, which was the most egregious (because it was the most powerful) of the lot.
Insider trading is essentially a failure of banking as a profession, with professional ethics. There is a fiduciary responsibility to shareholders (in the case of a company) and of clients (in the case of banks). Conflict-of-interest is a problem in every other work place. Why not here?
Besides conflict-of-interest, insider trading involves an explicit fraud on the client.
That’s in addition to the crime of fractional brokering, as someone cleverly puts it. (This is quite different from fractional banking. Due to the confusion of language that lets banks perform both safe holding and investing functions at once, fractional banking is legal). On the other hand, “fractional brokering,” which is what naked shorting and “fails-to-delivered” amount to, is illegal.
Unfortunately, the professional financial reporters seem too myopic to understand the gravity of the problem, our self-involved “gonzo” journalists (yes you, Matt Taibbi) are too politically-driven to explain it correctly, and right now I’m too disgusted by the intellectual dishonesty of the media to take the trouble to make the argument on the web and see it lifted by all and sundry with nary a link or footnote, let alone verbal acknowledgment.
As Cara points out correctly (and safely, since he’s in Canada), Wall Street and the American capital markets have become a joke, and a substantial part of the financial media still doesn’t seem to realize it’s the punchline.
That gives me no pleasure to say. For years, I defended American business to my foreign friends, claiming that Americans at least held to standards, regulations, and transparency requirements higher than theirs (meaning, Indian and non-Western).
Behind all the glitz “America” still operated somewhere, I argued.
The Marxists and communists who called the whole thing a charade and a lie didn’t quite get it, I was sure. The values of the American republic would prevail. Once most money-managers and businessmen were alerted to what was going on in the markets, I fully expected that their outrage would be enough to stem the rot. I saw CEOs stepping up to the plate and doing their duty, when the future of their own (rather than someone else’s) children was at stake.
That was four and a half years ago, when I first began researching the markets.In retrospect, I see I was incredibly naive.The rot goes deep.
Those are somber thoughts to have around Christmas time. But perhaps not inappropriate. If you recall, in the Christmas story, gold (or should I say, gld?) and frankincense were only two-thirds of the offering. The other third was myrrh. Myrrh is a resin whose oil, I read here, is used for embalming and whose incense is used by penitents at funerals and cremations.
That must be the bitter scent I smell rising from the capital markets.
Muckety Maps Barrick Gold-AIG Link
Marshall Cohen - current positionsBarrick Gold Corporation - directorCassels Brock & Blackwell - counselLafarge North America Inc. - directorMetaldyne Corporation - directorTD Ameritrade Holding Corporation - directorTriMas Corporation - directorMarshall Cohen - past positionsAmerican International Group, Inc. - directorCollins & Aikman Corporation - directorMolson Companies Limited - president & CEOMadoff -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.
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.
Major Market Move in Offing
Looks like there’ll be a good deal of volatility ahead in the markets this coming week and through the fall:
*From Monday last week onward, New York has been riled up by the news out of China that Chinese SOEs (State Owned Enterprises) might walk away on derivative contracts that they think have been deeply manipulated. (They’re right on that). The SOEs involved are Air China, China Eastern, and Cosco.
*The derivatives are not mortgage-backed securities (the cause of the 2008 melt-down) but - likely- hedged oil futures in the OTC (over the counter) market, which is unregulated (that is, the SEOs hold synthetic longs).
*The threat - if it is that - has forced gold out of its summer trading range to within points of the $1000 mark, before falling back..and it pushed up the Chinese market by about 5%.(Sept 3)
*The counter-parties are 6 foreign banks, said to include Goldman Sachs, UBS, and JP Morgan. Goldman could take a hit on the contracts for around $15 billion, it’s rumored.
Note: The Chinese have been buying IMF bonds (50 billion) and watching the US meltdown and “stimulus” hocus-pocus with a good deal of warranted alarm, because all it means is their investments are being manipulated and driven down.
Obama’s reappointment of Bernanke was also taken as a bad sign by the Chinese. (correctly).
*Rumors have been swirling of further defaults of major US banks.
*The G20 has a preliminary meeting this weekend and the Chinese are said to have put the purchase of off-market gold on the table.
*The Chinese are pushing gold and silver on their populations, probably in anticipation of a currency meltdown.
*Meanwhile, Hong Kong has asked for all its gold to be returned from London.
*Last week, Germany asked for all its gold to be returned from London.
*Meanwhile, Abu Dhabi Commercial Bank and King County, Washington State have brought suit against Moody’s, S&P, and Morgan Stanley on fraud charges for the contracts they wrote, a case that would have massive implications for how other contracts are treated.
*[Oddly (?), Washington State is also where the earliest swine flu cases in the US were detected and where one of the largest outbreaks on campus just surfaced today - with some 2000 students at Washington State University coming down with the virus. Washington State had previously received large grants from Homeland Security for emergency preparations for pandemics, had TV Public Service Ads in place, had written up plans and practiced exercises].
Government Profiting from Bailed-out Banks
In the news, AP reports:
“Critics of the bailout were concerned that the Treasury Department would never see a return on its investment. But the government has already claimed profits from eight of the biggest banks.
The Times cited government profits of $1.4 billion from Goldman Sachs, $1.3 billion from Morgan Stanley and $414 million from American Express. It also listed five other banks — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — that each returned profits between $100 million and $334 million.”
The government has also collected about $35 million in profits from 14 smaller banks, the Times reported.
Bail-Out for Insurers
In the news:
“The Hartford Financial Services Group Inc. was the first to disclose Thursday that it had been notified by the Treasury Department that it was eligible for $3.4 billion from the Troubled Asset Relief Program, or TARP. Lincoln National Corp., which commonly goes by the name Lincoln Financial Group, said it has been initially approved for a $2.5 billion injection from TARP’s Capital Purchase Program.
Allstate Corp., Ameriprise Financial Inc., Principal Financial Group Inc. and Prudential Financial Inc. also are among insurers receiving preliminary investment approval, Treasury spokesman Andrew Williams confirmed. He declined to disclose the amount of investment each company will receive.
The total capital injection into the six companies will be less than $22 billion, The Wall Street Journal reported, citing a person familiar with the situation…”
My Comment
22 billion might not seem like a lot, but insurers’ holdings have taken a big hit in recent months, it seems, and a cut in their ratings would have been likely once their assets fell below a certain level.
So you have government ownership of large parts of the housing market (which itself covers, in all its aspects some 30% of the economy), extensive government intervention in banking and insurance, government run trade, government run schools and colleges, government run social security and medicaid and medicare, and what does the left think the problem is? The free market!
Murray Rothbard on the Founding of the Fed
Rothbard on the founding of the Federal Reserve:
Hat-tip to the LRC blog/a>
Allied Irish Chairman Pelted with Eggs
In the news, BBC reports on another kind of Blackrock - Blackrock, South Dublin, where Gary Keogh was hastily removed from a building after chucking eggs at Dermot Gleeson, chairman of Keogh’s bank, Allied Irish. The outburst came at a shareholder’s meeting of Allied Irish to approve a 3.5 billion euro government recapitalization for the bank, which has lost 91% of its value over the past 12 months.
Said Keogh,
“I have no pension. My pension now is wiped out because of AIB. I cannot sell the shares because they are useless.
If we didn’t live in a tolerant society, the chairman and the rest of the board would be hanging by their necks with piano wire out on the road.
Meanwhile, inside, an unsettled Mr Gleeson stood in front of a blue AIB logo spattered with egg and continued to take questions from shareholders….”
My Comment
Hooray for Mr. Keogh.
Any society can only take so much ‘tolerance’ and ‘non-judgmentalism’ without bankrupting itself financially and spiritually.
The moral problem underlying all this is that we deny that actions have consequences. And we also refuse to judge our actions by their consequences.
We want to make every action free of consequence, although consequences are precisely what guide us in ordinary life.
We’re accountable when we drive on the roads, aren’t we?
So why do bankers get to abdicate that responsibility when it comes to larger social and economic issues?
Banks Chatting Up the Market
From Bill Cara comes this insight on the happy talk about the market:
“Stress tests at the US banks will show that much more capital is required, so the banks would like to talk this market higher to minimize the resultant dilution. However, they will have six months to raise that capital, and a lot can happen in that amount of time….”
Dollar Surprise
From Chris Gaffney, Vice-President of Everbank:
“As most would predict, the Mexican peso (MXN) has dropped significantly, moving down almost 3% versus the U.S. dollar overnight. Fears of a global pandemic have driven investors out of the high yielding currencies of New Zealand (NZD), Australia (AUD), and Brazil (BRL). Risk aversion seems to be back in vogue, with investors moving funds back into U.S. Treasuries and the Japanese yen (JPY).
I read a story over the weekend that suggested the U.S. dollar would continue to strengthen no matter what happens in the global economy. The story said that the U.S. dollar would increase if the administration’s efforts to stimulate our economy worked, and that we would lead the rest of the globe into the recovery phase. On the other hand, it said that the U.S. dollar would also strengthen if the global economy continued to weaken, as investors would purchase U.S. Treasuries as a safe haven.”
My Comment:
This insight about the performance of the US dollar has also been mine.
De-leveraging (which is the collapse of asset values as they’re sold to pay off debt) is going on now all over the world in different asset classes. And de-leveraging mostly needs the US dollar.
In spite of a few sharp corrections downward, that’s what has held the dollar index (DX) up for a bit longer than dollar bears had anticipated.
Holding up, of course, is not the same as “bull market”.
The dollar’s fundamentals are still bad.
I don’t have hopes for any currency tied to a government behaving so recklessly. I hesitate to write this, but some of the high-level corruption we’ve seen is actually beyond third-world.
I say this with no schadenfreude. It’s deeply, traumatically, disturbing to find so much rot at the heart of the global financial system. At the very core of the “international community, ” if you will.
The worst criticism of imperialism, or of statism, or of financial corruption didn’t prepare me for this.
And it makes me very afraid.
What example does such behavior set? What message does it send to a world which takes its cue from the West, and from the US in particular. Can we really expect better from other governments?
NY Times Wises Up to Banking Cartel (Update)
Finally. The New York Times is on the case.
(About a decade too late. But we’ll take an awakening whenever it comes and wherever, as we’ve said before).
At The Times, criticism of Tim Geithner’s insider status:
“A revolving door has long connected Wall Street and the New York Fed. Mr. Geithner’s predecessors, E. Gerald Corrigan and William J. McDonough, wound up as investment-bank executives. The current president, William C. Dudley, came from Goldman Sachs.
Mr. Geithner followed a different route. An expert in international finance, he served under both Clinton-era Treasury secretaries, Mr. Rubin and Lawrence H. Summers. He impressed them with his handling of foreign financial crises in the late 1990s before landing a top job at the International Monetary Fund.
When the New York Fed was looking for a new president, both former secretaries were advisers to the bank’s search committee and supported Mr. Geithner’s candidacy. Mr. Rubin’s seal of approval carried particular weight because he was by then a senior official at Citigroup.”
More at “Geithner, Member and Overseer of Finance Club,” Joe Becker and Gretchen Morgenson.
My Comment:
Here at The Mind-Body Politic, your diligent commentator makes it a point to cite people, even if they don’t reciprocate, so we will note appreciatively that Ms. Morgenson did the leg work that outed Goldman Sachs for its presence at the AIG bail-out (September 30, 2008). She deserves every credit for it.**
But that said, it still remains true that mainstream journalists today are moved less by the need to keep the public informed at the critical time than to bolster their reputations. That is really too bad and it’s why, increasingly, so many people disdain the press. Imagine doctors who watched the patient bleed and didn’t share information about his condition so they could “break” the case for themselves? What sort of professional ethic would that be?
Blogging and writing down intuitions as they occur is the only way of putting valuable information out into the public realm as fast as possible, so as many people can push back from as many angles as possible. That’s the only way to keep up the pressure on public officials. I could not ethically hold back on my insights, just to avoid having other people take them without acknowledgment. You’d think better positioned journalists would act with equal public spirit, especially as they - unlike bloggers - are paid rather well to do so.
Writing critically about Tim Geithner in 2009, after the milk’s been spilled, and when it’s public knowledge is one thing. Much better for the Times to have written about Geithner a few years ago, when it counted.
This is precisely why the reputation of the mainstream media among people who follow such things is a little below that of a loan officer at Fannie Mae.
Update:
Apparently, this piece provoked reaction elsewhere in the blogosphere, with Yves Smith at Naked Capitalism claiming that the piece is too kind to Geithner and Paul Kedrosky finding no smoking gun in all of it. Over at Portfolio.com, Ryan Avent sees it as evidence of Geithner being much less of an establishment figure, much less timid, than people think.
My own sense is that Geithner is more of a scape-goat, a convenient prop to beat up on. It’s the figures behind him, Rubin, Summers, Volker, (and a few others whom I’ll post on later), who are the important players.
As a further aside:
Note this sidebar from The Times (September 28, 2008):
The Reckoning: A Spreading Virus: Articles in the series are exploring the causes of the financial crisis
In the last two years, NRR , The New York Times , and a few other places, have repeatedly used the word “reckoning” for the financial crisis, as well as a a few other terms. They sound strangely reminiscent of my co-author’s very popular newsletter, The Daily Reckoning - well known to DC and NY financial circles. I’ve seen arguments from said missive (as well as from “Mobs”) lifted wholesale….
No one owns words or phrases or ideas. Or leads. There is no monopoly on them. And all writers are only too happy to have people read them, no matter what.
But political journalism is not simply any journalism. It plays a vital part in the creation and preservation of public memory. And that memory, that record, is essential to monitoring the state - which is the role of the fourth estate. Journalistic ethics, which cannot be enforced in the courts alone, demands a degree of personal integrity to function as it should in creating and preserving that record.
With notable exceptions, this integrity is not much in supply any longer.
So, while stoning the banking cartel for its sins, let’s keep a few chunky pebbles for the media cartel.
Footnote:
**[I wrote a piece on AIG and Goldman Sachs the week before Morgenson's piece. My piece was widely disseminated in the blogosphere (and to members of Congress, I learn from readers) and since Morgenson had never written critically about Goldman's insider ties with AIG before, I have more than a suspicion she took the lead from that piece -- "Lipstick On An AIG" (Counterpunch, September 18-19, 2008)].
PS. I wrote both Morgenson and Jim Pinkerton (who mentioned Morgenson’s story on TV the following weekend), requesting correct attribution. There was no reply.
To the reader who writes to me that such imitation is a form of flattery, I wish….
It has nothing to do with flattery. It’s an attempt to co-opt language. It’s a way of muddying the waters. It’s revisionism. And its goal is to steer your mind the way that opinion-makers (who only voice choices within a carefully vetted spectrum) would have it go. Don’t be misled by the apparent opposition between the left and the corporate class. Communists and capitalists have always colluded when necessary. Certain kinds of capitalists (corporatists) love the state and they love communism — for you.
They know they’re always going to get the perks and privileges of the ruling class, while equality for everyone else makes for a pliable, governable body politic…
A Depression Ditty
Alan G, the banker’s man
Cut the rate and away he ran
The books were cooked,
The thieves have booked,
Now Ben Bernanke’s
On the hook…I’ve decided that treating this whole business as a tragedy/calamity doesn’t do it justice. Ridicule, taunting, and scorn are the proper responses.
And some of that needs to be directed at our own selves.
We’ve lived comfortably in a society where “branding” and “image” are everything - substance is nothing.
We’ve lived comfortably with a two-tier education where brilliant people are routinely overlooked in favor of empty suits with friends in high places.
We were comfortable with millions of people all over the world subsidizing “free markets”..
We were comfortable with the morals and manners of the gangsters who are our elites, as long as the pendulum was swinging our way.
Now that it’s stopped and hit us, we’ve changed our tune.
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