October, Friday 14, 2011

DOW + 166  = 11644
SPX  + 20 = 1224
NAS +47 = 2667
10 YR YLD +=2.23%
OIL +3.11 = 87.34
GOLD +13.20 = 1680.80
SILV +.34 = 32.26
PLAT + 23.00 = 1557.00


Reminder: Financial Balance with David Harris starts Wednesday.

Open Phone Friday.

Eat the Bankers – buy the book before they make it into a movie

Sunday – Hard Money Watch with guest Jim Liles
Monday – Our scheduled guest on the Review will be Dr. Ravi Batra

The Commerce Department said retail sales rose 1.1 percent in September, with strong auto purchases providing a big boost. Sales for August and July were revised higher as well.

The University of Michigan Consumer confidence survey dropped to 57.5 for October – down from 59.5 in September.

The G-20 finance ministers and central bankers are meeting for the next couple of days in Paris. The expectation is that they will not completely resolve the European economic crisis, but they won’t allow everything to implode. One idea being floated was to double the size of the IMF’s bailout fund. Treasury Secretary Timothy Geithner and his Canadian and Australian counterparts poured cold water on the idea. The IMF's dominant shareholders, including the United States, Japan, Germany and China are content that the fund's $380 billion worth of resources is enough.

It looks like the plan is to make the Euro-banks accept bigger losses on the Greek debt and then leverage the EFSF to recapitalize the banks. The more the banks lose, the more they’ll get bailed out.

Standard and Poor's cut Spain's long-term credit rating, citing the country's high unemployment, tightening credit, and high private sector debt.

Standard & Poor's Ratings Services took multiple ratings actions on France's five largest banks, including a one-notch downgrade for BNP Paribas

Let’s start Open phones with an email – our first email:

There were reports of paid demonstrators in DC today; no way to tell if this is real though.
This Craig's List ad appears to be from The Working Families Party. (I’ve never heard of the Working Families Party)

"FIGHT TO HOLD WALLSTREET ACCOUNTABLE NOW! MAKE A DIFFERNENCE GET PAID!"

Compensation $350 - $650 a week.

(For those who claim nothing good has come out of the protests, clearly this is not the case – jobs are being created. And for those who claim the protesters are an unwashed band of ne’er do well socialists – clearly this proves that they are rather the long-lost tribe of job creators.)

Our next email comes from a highly intelligent and perceptive listener who writes: “We really look forward to and enjoy the Financial Review every evening! It is always spot on with what's really happening” She then directs me to an article she found on the internets:

Now, let me set this up – yesterday, JPMorgan reported 3^rd quarter earnings of just over $4billion, but closer examination revealed that $1.9 billion of those profits was the result of some accounting trickery.

The one item everyone is raising red flags about is the $1.9 bill pretax DVA gain. DVA is short for debt valuation adjustment. In 2007, the Financial Accounting Standards Board adopted Statement 159 which allows banks to book profits when the value of their bonds falls from par. The rule expanded the daily marking of banks trading assets to their liabilities, under the theory that a profit would be realized if the debt were bought back at a discount.

In other words, when traders bet against a banks bonds, causing credit default swap spreads to soar, the bank is allowed to book a mark-to-market gain.

Statement 159 was passed by the FASB in 2007.  The banks lobbied hard for this accounting rule to be passed. Then in 2009 the same bankers lobbied to eliminate mark-to-market accounting because it was unfair and did not represent fair value pricing.

So, how did they come up with the idea that you could get a gain? Well, if the bonds went down in value, then theoretically, the bank could buy back the bonds at a lower price and pocket a profit – it almost makes sense if you don’t think about it – and if you can’t grasp the logic, then the other reason to post this as a profit is when the banks bonds went down in value, the bank is able to bet against its own assets by using credit default swaps.

I read the article and then I read the comments posted by other readers. Generally, people seemed upset; they apparently think there is something “deceptive” about listing losses as profits. Some of the comments used words like deception, fraud, illogical, slimebags, sleazy, perverse, and even illegal. However, this is apparently legal. The banks are just following the rules. And that’s when I realized the true brilliance of the US financial and accounting system.

JPMorgan should not be vilified – my goodness these people are superior investors – they spend a few million on lobbyists, they spend a few million on lawyers and accountants to write the accounting rules, and in return – they profit to the tune of $1.9 billion – and that’s just the third quarter profit. Can you get this kind of return on investment building cars in Detroit? NOOO. Can you get this kind of ROI from an oil drilling operation in the Gulf of Mexico? Welll….. maybe (I mean the depreciation allowance and credit is a sweet little piece of accounting) but, can you make this kind of Return on Investment growing food in Nebraska? Come on- admit it the bankers are pure genius.

I know what you’re thinking – the bankers may be very clever – they write the rules and they profit, but they’re just greedy, self-serving bankers. Well, yes – but they may have solved the entire global economic crisis.

Think about it – If falling bond prices don’t really represent a loss – if falling bond prices mean you really made a big profit – what does that mean for Greece. The Greek’s sovereign bonds have literally been collapsing – but now we realize this is a HUGE profit potential for Greece.

Today we get news the US government ran a $1.3 trillion deficit for the budget year that ended last month. The nation's debt is now $14.8 trillion. The enormity of that figure has stoked intense partisan debate in Congress over spending and taxes. Polls show growing voter anger with the inability of both parties to reach solutions to the country's budget problems. Actually, if we just follow the JPMorgan solution there is no need for consternation. According to the JPMorgan formula, that $14 trillion dollar debt is a REALLY HUGE profit.

Ben Bernanke can forget about QE3 – just institute DVA 1 – the economy is juiced my friend.

And the housing market collapse – problem solved. If you owe more than your home is worth – that’s not an albatross around your neck – that’s a golden parachute. The more negative equity you have the richer you are. C’est si bon! – like the French people say. Let the good times roll.

You may think this is just crazy – but hey, I didn’t write the rules.

JPMorgan did.

So, what is the lesson we have learned? Well, let’s look back three years ago. We faced a global financial meltdown; it started with the banks, and it appeared the banks would implode under the recklessness of their dangerous casino mentality, but within a few months the banks got their swagger back – if you had bet against the bankers in the Spring of 2009, you would have lost your shirt, and somehow the bankers rallied.

Fast forward to today: The big banks got bigger; regulations to rein in excess are still on the drawing board; European banks are on the edge of collapse and the best minds are calling for bailouts. The game is rigged. When I say the banks write their own rules – I’m not talking figuratively – they literally write the accounting rules. They literally write legislation. Your Congressional representatives do not write legislation – it is written by lawyers, working for lobbyists, hired by the biggest corporations in the land.

The lessons learned – I’m still not sure. Perhaps the next part of history is just now being written.

"For now, capitalism is working to produce more money but does not see the people. This problem is getting worse across the world." So says Lech Walesa, Poland’s former president, the leader of the Solidarity movement, and the Nobel Peace Laureate. Walesa says he supports the Wall Street protesters and is even considering a visit.

The Wall Street protesters faced a bit of a showdown today. NYC Mayor Bloomberg told the protesters to get out of Zuccotti Park, that he was going to have them evicted, so the park could be cleaned. And then the Mayor and the police and the powers that be in NYC backed down. By the end of the day, Bloomberg says he wasn’t making any decisions about removing the protesters. There were a few arrests. In Denver, protesters were evicted from a park; there were more than 40 arrests. The whole world is watching. Tomorrow, rallies are scheduled across the nation and in more than 71 countries – and even right here in Phoenix.

I’ve been reading quite a bit about the protests – one article brought up the quote from Gandhi: “First they ignore you, then they laugh at you, then they fight you, then you win.” The guy who wrote that article thinks we’re at the end of the “then they laugh at you” phase. Probably – It’s starting to get very interesting.

A couple of years ago I wrote a book – the title is Eat the Bankers – and I included a quote from Gandhi: “poverty is the worst form of violence” and one of the things we should have learned from Gandhi is that oppression and injustice will ultimately and inevitably fail. Truth must always prevail.

“ So who’s really being un-American here? Not the protesters, who are simply trying to get their voices heard. No, the real extremists here are America’s oligarchs, who want to suppress any criticism of the sources of their wealth. „

Paul Krugman in Panic of the Plutocrats - NYTimes.com