November, Tuesday 01, 2011

Financial Review: Greek Referendum, MF Thieves, BofA Fees, Food Stamps and Soup Kitchens

DOW – 297 = 11657
SPX  - 35 = 1218
NAS – 77 = 2606
10 YR YLD – 0.17 bp = 2.00%
OIL - .94 = 91.55
GOLD + 4.80 = 1720.90
SILV - .79 = 33.55
PLAT – 7.00 = 1593.00

Greece is insolvent. According to the Grand Plan announced last week, Greece will continue to be insolvent for another 20 to 30 years, give or take. Even if the Greeks take the bailout money it will be insolvent.  And over that next few decades, the Greeks will be forced to tighten their belts, forced to pay higher taxes, forced to privatize big chunks of the government, public services will be cut even more, unemployment will rise, the Greek economy will contract, and the standard of living will fall. All the sacrifices won’t make Greece solvent again.

And so Greek Prime Minister George Papandreou decided to put the bailout to a vote of the people; he has called for a referendum. If Greek voters reject the draconian terms of the bailout, there will be default, the Greeks will get tossed out of the European Union, unemployment will go higher, the economy will contract, and the standard of living of most Greeks will deteriorate. And then in about six months to 2 years – things will get better; Greece will be solvent and they will get a fresh start.  The Greeks’ economy will grow without the bankers’ boot heel pressing down on their throats.

There is strong political opposition to a referendum. The powers that be don’t like it when their debt slaves start getting uppity. Other European nations are trying to nix the plan. Germany’s Merkel and France’s Sarkozy will meet with Papandreou tomorrow. There is political opposition within Greece; there might even be a snap vote of confidence to kick Papandreaou out of office.  Still, the latest survey shows about 60% of Greek voters have a negative view of the bailout plan announced last week. So, Papandreou also has to consider the possibility that one of these days, Greek protesters will break through the police lines and storm into his office. Democracy may be messy but revolutions can get real ugly.

If there will be a vote, it would likely be held in January; plenty of time to influence the populace and rig the ballots. With our without a referendum; if the Greeks submit to the bailout then all of Europe on the road to perpetual bailouts. A precedent will be established. The Italians will soon be forced to raise taxes to pay the debt due to the international financiers. Then the Portuguese and the Spanish will be forced to lower their standard of living in order to service their debts to the bankers. The quality of living will deteriorate. They’ll be no better off than…, Americans.

You may remember that we didn’t get a chance to vote on the bailout. We like to talk about democracy, but the Greeks invented it. The Grand Plan that emerged from last week’s European Summit had no respect for democracy. The Grand Plan was designed to obfuscate, to extend - and pretend that excessive debt is acceptable. We know that poverty is the worst form of violence, and the corollary that debt is the worst form of poverty.

Papandreou is already bowing to pressure. He says: “political forces should support the ’bailout’ agreement. The citizens will do the same once they are informed.” Maybe maybe not. The PM adds: “We have fiath in our citizens, we believe in their judgment and therefore in their decision” As I’ve been reading about the European crisis, I’ve seen several articles describing the Greek economy as some abomination that abhors free markets. But whose economy is it anyway? It is the Greeks’. And the Greeks probably know how to spend their own money better than the bankers.

DB  -2.91 = 38.50
RBS - .63 = 7.11
MS – 1.41 = 16.23 Morgan Stanley down almost 17% in 2 days
BAC - .43 = 6.40

October may have been a gift. Europe could implode. It might implode in 3 days or three months or maybe longer. But at some point you have to weigh the risk versus the reward. You’re not investing based upon the price/earnings of a given company; you’re not investing on the patterns or trends in a chart. I’ve talked about the seasonality of the markets, the presidential election cycle, the Santa Claus rally, and the simple fact that we haven’t fallen off the cliff should be considered a real positive, however you are in the market at the risk of a European implosion. And October looks like a gift.

We are learning details on MF Global. John Corzine’s shadow banking venture/ casino was leveraged at about 40 to 1. Quite simply a 2.5% loss wipes out the entire venture. After a pattern of losses through 2011, last week MF reported a quarterly loss of $191 million. The good news is that MF Global only had about $8 billion – not big enough to take down the system and not big enough to require a government bailout. The bad news is that the leverage wiped out more than $8 billion. Lehman Brothers was leveraged 35 to 1 before it collapsed. The worse news is that there are bigger players playing the same dangerous game.

The worse news is that it appears MF Global diverted customer accounts to cover the brokerage firm’s own proprietary trades. That’s the polite way to say it – they diverted funds. If you want greater accuracy in language – they stole from their clients – they are thieves. It appears officials from MF have admitted to federal regulators that they took money out of customers’ accounts; maybe $700 million; maybe more. The remaining question is whether they have been stealing from clients for a long time or if they just started stealing as their proprietary bets went bad and they grew more desperate. Regulators still don’t know where the money went.

Meanwhile, PWC, PriceWaterhouseCoopers, offered clean opinions on MF Global as recently as May, when they issued their annual report; everything was peachy. The executives of MF are an incestuous hodgepodge of big wigs that also happen to be connected to auditors and ratings agencies – especially Standard & Poors. FYI, Standard & Poor’s was the last ratings agency to downgrade MF last week, well after the losses were reported. Apparently basic math doesn’t’ apply at Standard & Poor’s.

It was just a big cozy den of thieves. Who could have known?

Meanwhile, you know that investment banks and brokerages are leveraged at these crazy levels – 40 to 1 or more – and now we hear MF was stealing from customers’ accounts. Would the other big investment banks and brokerages steal from your account? How would you know? Would the auditors pick up on the accounting discrepancy? Would the ratings agencies pick up on a problem? What about the regulators? What regulators? And do you really think that MF Global is the only one that’s pulled this little trick of “comingling” customers’ funds with their proprietary trades? Do you have faith in these brokerages? Should you?

Bank of America will eliminate its plan to charge $5 per month for using a debit card. The plan made customers howling mad and BofA learned their lesson. They will tack on new charges through new value added services and subtle price hikes on products and services you already use. They will extract their pound of flesh but in the future, they’ll do it quietly.

The number of Americans receiving food stamps reached a record 45.8 million in August.

The figure was 1.1 percent higher than the previous month and 8.1 percent more than a year earlier.

Texas had the most food-stamp recipients in August, at 4.12 million, followed by California with 3.82 million. Spending was a record $6.13 billion.

The number of Americans receiving food stamps under the Supplemental Nutrition Assistance Program has set records every month but one since December 2008.

I’ve had some good conversations with a whole gaggle of economists about whether we are in a depression. Some of them agree with me that we are in a small “d” depression. That’s what I’ve been saying since 2008. Some think we are in a Great Recesssion. Still others say we were in a bad recession but we are out of it now; things aren’t great but it doesn’t meet the technical definition of a recession.

Well, take away the food stamps – tell all those people that the only way they get to eat tonight is by lining up outside a soup kitchen. And as the lines stretch down the sidewalks of every city in America I would dare any economist to tell me we are not in a depression.