November, Monday 28, 2011

DOW +291 = 11523
SPX + 33 = 1192
NAS +85 = 2527
10 YR YLD -.01 = 1.96%
OIL +.98 = 97.75
GOLD +29.60 = 1710.90
SILV + 1.08 = 32.16
PLAT + 15.00 = 1549.00

Europe was totally copasetic, at least for today; I’ll get to the details in a moment. Here in the USSA, we spent the weekend doing what we do best, overeating and over-shopping. I want to start today with a news item that did not move the markets, but it is worth noting. A US District Judge in Manhattan actually stood up to Wall Street and refused to let the SEC sweep yet another case of high-level criminal malfeasance under the rug; the judge refused to let a major bank walk away with a slap on the wrist. There is a chance we could see actual justice, and the odds of that happening are so rare, the probabilities so astronomical – you are more likely to see a team of pink unicorns and Haley’s Comet.

The SEC had brought an action against Citigroup for misleading investors about the way a certain package of mortgage-backed assets had been chosen. The case is very similar to the Abacus Case  involving Goldman Sachs, in which Goldman allowed short-selling billionaire John Paulson (who was betting against the package) to pick the assets, then told a pair of European banks that the “designed to fail” package they were buying had been put together independently.  

This case was similar, but worse. Here, the SEC accused Citi of selling a $1 billion mortgage linked CDO right ast the housing market was collapsing and then betting against it.  Citi told investors a package of mortgages had been chosen independently, when in fact Citi itself had chosen the stuff and was betting against the whole pile.

This whole transaction actually combined a number of Goldman-style misdeeds, since the bank both lied to investors and also bet against its own product and its own customers. In the deal, Citi made a $160 million profit, while its customers lost $700 million.

In this worse case, the SEC was trying to settle with Citi for just $285 million. Judge Rakoff balked at the settlement and particularly balked at the SEC’s decision to allow Citi off without any admission of wrongdoing. He also mocked the SEC’s decision to describe the crime as “negligence” instead of intentional fraud, taking the entirely rational position that there’s no way a bank making $160 million ripping off its customers can conceivably be described as an accident.
 

Judge Jed Rakoff in Manhattan said the Securities and Exchange Commission appeared uninterested in actually learning what Citigroup did wrong, and erred by asking him to ignore the interests of the public.

Rakoff wrote that: "An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous."

The judge added that it was difficult to discern "from the limited information before the court what the SEC is getting from this settlement other than a quick headline."

He said the proposed settlement was "neither reasonable, nor fair, nor adequate, nor in the public interest."

Rakoff called the Citigroup accord too lenient, noting that the bank was charged only with negligence, neither admitted nor denied wrongdoing, and could avoid reimbursing investors for more than $700 million of losses. Private investors cannot bring securities claims based on negligence.

"If the allegations of the complaint are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business," the judge wrote.

The settlement would have required Citi to give up $160 million of alleged ill-gotten profit, plus $30 million of interest. It also would have imposed a $95 million fine for the bank's alleged negligence, less than one-fifth what Goldman Sachs Group Inc paid last year in a $550 million SEC settlement over the Abacus case.

Rakoff called the $95 million fine "pocket change" for Citigroup and said investors were being "short-changed."

Rakoff wrote: “Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?” And this: “How can a securities fraud of this nature and magnitude be the result simply of negligence?”

Rakoff of course is right – the settlement is nuts. Over the last decade, Citi has repeatedly been caught committing a variety of offenses, and time after time the bank has been dragged into court and slapped with injunctions demanding that they refrain from ever engaging the same practices ever again. Over and over again, they’ve completely blown off the injunctions, with no consequences from the state – which does nothing except issue new (soon-to-be-ignored-again) injunctions.

In this current case, this particular unit at Citi had already been slapped with two different SEC cease-and-desist orders barring it from violating certain securities laws.

 One of those orders came in a 2005 settlement, the other in a 2006 case. The SEC’s complaint last month didn’t mention either order, as if the entire agency suffered from amnesia.

The SEC’s latest allegations also could have triggered a violation of a court injunction that Citigroup agreed to in 2003, as part of a $400 million settlement over allegedly fraudulent analyst research reports. Injunctions are more serious than SEC orders, because violations can lead to contempt-of-court charges.

 But the SEC avoided the issue of the 2003 injunction by charging Citi with a different type of fraud.

 And what does the SEC do? It doesn’t even bring up Citi’s history of ignoring the SEC’s own order, slaps the bank with a fractional fine, refuses to target any individuals, allows the bank to walk away without an admission of wrongdoing, and puts a cherry on the top by describing the $160 million heist not as a crime, but as unintentional negligence.

Imagine a predator who preys on young children, and he is trying to lure a young child off the playground and into his van, and the kid gets in the van and a cop sees this and stops the predator. The predator tells the cop it’s a misunderstanding and the cop lets him drive away. Then two years later, same predator, same van , same playground, and a different kid. And again, the cops buy the story and send him home without a charge.

And this is not an isolated example. Apparently the predator has been doing this in other playgrounds, and other kids. Of course Citi is not a predator preying on little kids in the schoolyard. That kind of predator only hurts one child at a time. Citi’s actions screwed  hundreds of investors and whole families.

 In the latest Citi case, the $700 million fraud was just one of many dicey CDOs marketed by that unit of Citi. But the SEC chose to address just that one case in its settlement.
A few years ago, judge  Rakoff rejected an SEC settlement with Bank of America, which was accused of misleading shareholders about the size of the bonuses paid out by Merrill Lynch, the investment bank BofA was in the process of acquiring. Rakoff dismissed the original $33 million fine as “half-baked justice,” although he eventually approved a $150 million fine.
Here’s the real problem with these settlements that allow a big bank or corporation like Citi to reach a settlement without admitting or denying guilt – it is not equal justice. It is a special privilege reserved for mega corporations. You can’t get that kind of justice – you would go to jail. And if we are not equal in the eyes of the law, then there is no justice. When will other judges grow a spine? What Judge Rakoff has done is rare – and that may be the scariest part of this story.

 Moody’s Investor Services, the ratings agency, warned that the Euroland debt problems could lead multiple countries to default on their debts or exit the euro, which would threaten the credit standing of all 17 countries in the currency union.

Despite the gloomy predictions, stock indexes rose sharply in Europe and Asia, and were surging in Wall Street trading, and the euro strengthened, on hopes that European leaders were working on a new approach to resolve the crisis.

Virtually everyone in Europe, if not the world, agrees. At their many conferences and summits throughout the two-year debt crisis, Europe's leaders have routinely insisted that further coordination is the best solution. Today, President Obama hosted a US – European Union summit in Washington and he said the United States is willing to do its part to help resolve the European debt crisis. Obama said the European crisis is a "huge issue" for the U.S. economy and that the United States has a stake in its successful conclusion. So, how much is this going to cost us?

Well, last Thursday, the Federal Reserve injected $88 billion into a cash account; the cash account was labeled “other” and reported under the H.4.1 Factors Affecting Reserve balances – which is the technical way of saying the money could have ended up almost anywhere – maybe the IMF (the International Monetary Fund), or the World Bank, or the European Central bank, or the European Stabilization Fund; the money might have been used for emergency foreign currency exchange intervention – nobody knows and the Federal Reserve isn’t talking. But the markets were talking today. And we’ll see what happens later this week, when Italy, Spain, and France have bond auctions.

White House spokesman Jay Carney said Obama's message behind closed doors was that "Europe needs to take decisive action, conclusive action to handle this problem, and that it has the capacity to do so."

In Brussels, finance ministers of the 17-nation currency area meet tomorrow to approve detailed arrangements for scaling up the European Financial Stability Facility rescue fund to help prevent contagion in bond markets.

Black Friday gave way to small business Saturday and now we’ve moved on to Cyber Monday. And there have been some screaming deals for people willing to be trampled an pepper sprayed to purchase really cheap bric-a-brac and geegaws. Retail sales over Thanksgiving weekend totaled $52.4 billion, a 16.4% increase from 2010. Shoppers spent an average of $398.62 over the holiday weekend, a 9.1% increase from last year and the biggest gain since 2006. The numbers and statistics from Black Friday sales will be tweaked and revised as the shopping season gathers steam. Consumers and retailers shouldn't necessarily dismiss the numbers being reported, but it's too early to assume that retail spending can continue at its current pace. Retailers don’t necessarily make big profits from promotional deals. And the buying is not necessarily an indication of a strong economy.

It’s been about a month since MF Global began spiraling towards bankruptcy and still there’s no clarity about what happened to the missing customer money that was supposed to be kept in untouchable, segregated accounts. It’s not even clear how much money is missing.

Holdings in exchange-traded products backed by gold reached a record 2,350.8 metric tons on Nov. 23, now valued at $127.6 billion.