December, Friday 16, 2011

DOW – 2 =11,866
SPX +3 = 1219
NAS +14 = 2555
10 YR YLD -.06 = 1.85%
OIL +.08 = 93.95
GOLD +28.60 = 1600.20
SILV +.46 = 29.84
PLAT +14.00 = 1427.00

The Irish economy shrank 1.9% in the third quarter. The news on the declining Irish GDP comes as legal advisers are preparing a draft of a referendum on whether Ireland wishes to remain in the Eurozone.  Any deal to keep Ireland in the European Union would likely result in at least a decade of austerity. Countries with a debt-to-GDP ratio of over 60 per cent would agreed to reduce their debt by 5 per cent each year – a clause which would force Ireland, with a debt-to-GDP ratio of around 90 per cent, to take billions more out of each Budget for the medium-term future. Eurozone leaders have been talking up Ireland as a shining example of how you can combine austerity with membership of European Monetary Union and still get growth. So much for the Irish miracle.

The National Institute for Statistics and Economics says France’s GDP will contract by 0.2% in the fourth quarter and shrink 0.1% in the first quarter of next year. A different report is forecasting Italy’s economy will shrink by 1.6% in 2012. Toss in Portugal, Greece, and Spain and it is pretty obvious that Europe is now in a recession.

Three top US officials testified before Congress this morning on the Euro Crisis. New York Federal Reserve Bank President William Dudley, Treasury Deputy Assistant Secretary for International Affairs Mark Sobel and Federal Reserve Division of International Finance Director Steven Kamin testified before the House Oversight and Government Reform subcommittee.

Steven Kamin, the Federal Reserve Board’s Director of International Finance said Euro nations face doubts about their near-term liquidity, the stability of their banking systems, and a critical problem of confidence. Kamin said: “It is incumbent upon European authorities to address all these issues, and indeed they have taken a number of steps on all three fronts.”

Dudley said he “cannot imagine” the U.S. central bank buying European sovereign debt to combat the crisis, though it has the legal authority to do so. Dudley defended the Fed’s currency-swap lines to foreign central banks under questioning from lawmakers, saying that the loans are “about helping ourselves.” Dudley said Europe has the “fiscal capacity” to solve its issues. So bond purchases “no” but currency purchases “yes”.

Anthony Sanders, a George Mason University finance professor, told Congress the Federal Reserve may lend $1 trillion to central banks as Europe’s crisis deteriorates – maybe more than a trillion. That would be nearly double the amount from 3 years ago. European financial companies led by Royal Bank of Scotland were borrowing about $538 billion directly from the Fed when the central bank’s emergency loans to all banks peaked at $1.2 trillion on December 2008.

Some of the world’s most powerful investment banks were downgraded by ratings agency Fitch. The banks that were downgraded last night include US banks Bank of America and Goldman Sachs, Barclays and France’s BNP Paribas. Switzerland’s Credit Suisse and Germany’s Deutsche Bank were also cut. 

 

Fitch Ratings Agency revised its outlook for France from stable to negative but maintained a triple-a rating. Fitch warned it might downgrade six other nations: Italy, Spain, Ireland, Belgium, Slovenia, and Cyprus. Fitch says a comprehensive solution to the Eurozone crisis is “beyond reach”.

 

The most recent grand plan to save the Eurozone was hanging in the balance as Hungary and the Czech Republic claimed it would be damaging and protesters in Warsaw demanded Poland stands firm against Angela Merkel and the last plan that came out of the Brussels summit.

 

Christine Lagarde, the head of the International Monetary Fund says the crisis is escalating and is so serious that the Eurozone countries can’t solve the problem alone; they need a collective effort, “as collectively as possible” she says: “It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action.” In other words, the Federal Reserve is going to have to step into the quagmire. Without action, Lagarde says the world faces the spectre of a 1930s-style depression.

 

Meanwhile, the solution to the Eurozone Crisis may have been discovered in Portugal. A top politician was taped at a party dinner calling for diplomatic warfare against the EU's northern powers and issuing threats of debt default. "We have an atomic bomb that we can use in the face of the Germans and the French: this atomic bomb is simply that we won't pay," said Pedro Nuno Santos, vice-president of the Socialist Party in the parliament.

"Debt is our only weapon and we must use it to impose better conditions, because recession itself is what is stopping us complying with the (EU-IMF Troika) accord. We should make the legs of the German bankers tremble,"

 

Mr Nuno Santos said Europe's southern states should join forces to resist the austerity dictates and contractionary policies being imposed by the core powers.

The lesson being learned in Europe is apparently the lesson being learned in the USSA. A new poll from the Pew Research Center shows roughly three-quarters of the public, 77%, say that they think there is too much power in the hands of a few rich people in the United States; 61% of Americans now say the economic system unfairly favors the wealthy and just 36% say the system is generally fair to most Americans. The public has a negative view of Wall Street; 36% say Wall Street helps the American economy more than it hurts, but a majority, 51% say Wall Street hurts the economy more than it helps.

We’re not very satisfied with our elected officials either – 67% say most members of Congress should be voted out of office in 2012 – that is the highest level of dissatisfaction on record. The Republican Party is taking more of the blame than the Democrats for a do-nothing Congress. A record-high 50% say that the current Congress has accomplished less than other recent Congresses, and by nearly two-to-one (40% to 23%) more blame Republican leaders than Democratic leaders for this. 

The arguments and concerns of the Occupy Wall Street movement are supported by many Americans, but most continue to reject the core conclusion that America is divided into a nation of “haves” and “have-nots.” Moreover, while the Occupy Wall Street movement draws more support than opposition, its tactics are criticized, with far more saying they disapprove than approve of the way the protests have been carried out.

Public assessments of the American economy remain gloomy – about nine-in-ten say the economy is in only fair (38%) or poor (53%) shape. Looking forward, most say things will either be the same (50%) or worse (18%) a year from now. About three-quarters (76%) see the size of the national debt as a major threat to the economic well being of the United States.

Most Americans (55%) continue to cite economic issues as the most important problem facing the country. And unemployment is the top issue facing the country.

On the whole, Americans continue to say hard work leads to success; 58% agree with the statement that “most people who want to get ahead can make it if they are willing to work hard,” but this is substantially lower than the proportion expressing this view in previous surveys. Today, 40% agree that “Hard work and determination are no guarantee of success for most people.” 

So, what do you think? Does Wall Street hurt more than it helps?

Does hard work and determination pretty much guarantee you can make it or not?

Is the country divided into haves and have-nots?

What is the most pressing problem in America?

And when you go to vote next year, will you vote to throw the bums out?

The Labor Department said the consumer price index was flat last month on a seasonally adjusted basis. The so-called core rate of inflation, however, rose 0.2% in November to mark the biggest increase since August. That means energy prices were a little lower last month.  The price of energy, however, is still 12.4% higher compared to one year ago. Food prices were just slightly higher last month. Consumer prices are still 3.4% higher compared to 12 months ago. Higher consumer prices have easily outstripped inflation-adjusted wage increases over the past 12 months, so Americans have had to make do with less.

In November, for example, average hourly wages fell 0.1% to $10.22, adjusted for inflation. Real wages have fallen 1.5% since November 2010.

If quality declines, but the price stays the same, is that inflation?

(It should be under the "hedonic" methodology employed - when prices go up or stay flat and features/quality improve, that is reflected in inflation measures as a reduced increase or decline - so flat with declining quality should reflect an increase in the inflation rate.., although not necessarily. Yes, but then, how much of the hedonic adjustments are based on historic trends/opinions of product qualities? How long might it be before an item's quality deterioration gets recognized?)

(so flat with declining quality should reflect an increase in the inflation rate.

That's what I think is happening, which is going to hammer poor and working class people the hardest, because they can't afford good quality, even if it were available, so they have to replace the shoddy stuff more frequently. I see this happening across the household goods spectrum, from clothes, to brooms, to washing machines.) There used to be a saying - I'm too poor to afford cheap products. Translation: buy less, buy better, keep it forever or do without. We will need to send a couple generations of Mericans to re-education camps.

A couple of civil lawsuits against Fannie Me and Freddie Mac and 6 former executives of the government backed mortgage lenders. The SEC alleges they “knew and approved of misleading statements” that claimed the companies had minimal exposure to higher-risk mortgage loans, including subprime loans, at the height of the home mortgage bubble.

Meanwhile, you may remember the story about US District Judge Jed Rakoff, who told the SEC that he would not accept a slap on the wrist settlement between the SEC and Citigroup. The Judge rejected a settlement which involved claims that Citigroup misled investors and then bet against investors in a billion dollar financial product linked to risky mortgages. Now the SEC is appealing the judge’s decision. The SEC doesn’t want to take Citi to trial, they just want to find the easy way out – justice be damned.

Wachovia, now Wells Fargo, Agrees to $148 Million Settlement With SEC and Other Authorities

The Securities and Exchange Commission on December 8th charged Wachovia Bank N.A. with fraudulently engaging in secret arrangements with bidding agents to improperly win business from municipalities and guarantee itself profits in the reinvestment of municipal bond proceeds.

The SEC alleges that Wachovia generated millions of dollars in illicit gains during an eight-year period when it fraudulently rigged at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico. Wachovia won some bids through a practice known as “last looks” in which it obtained information from the bidding agents about competing bids. It also won bids through “set-ups” in which the bidding agent deliberately obtained non-winning bids from other providers in order to rig the field in Wachovia’s favor. Wachovia facilitated some bids rigged for others to win by deliberately submitting non-winning bids.

Wachovia agreed to settle the charges by paying $46 million to the SEC that will be returned to affected municipalities or conduit borrowers. Wachovia also entered into agreements with the Justice Department, Office of the Comptroller of the Currency, Internal Revenue Service, and 26 state attorneys general that include the payment of an additional $102 million. The settlements arise out of long-standing parallel investigations into widespread corruption in the municipal securities reinvestment industry in which 18 individuals have been criminally charged by the Justice Department’s Antitrust Division.

“Wachovia won bids by playing an elaborate game of ‘you scratch my back and I’ll scratch yours,’ rather than engaging in legitimate competition to win municipalities’ business.” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
          Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, added, “Wachovia hid its fraudulent practices from municipalities by affirmatively assuring them that they had not engaged in any manipulative conduct. This settlement will result in significant payments to municipalities harmed by Wachovia’s unlawful actions.”

Wachovia Bank is now Wells Fargo Bank following a merger in March 2010.
When municipal securities are sold to investors, portions of the proceeds often are not spent immediately by municipalities but rather temporarily invested in municipal reinvestment products until the money is used for the intended purposes. These products are typically financial instruments tailored to meet municipalities’ specific collateral and spend-down needs, such as guaranteed investment contracts (GICs), repurchase agreements (repos), and forward purchase agreements (FPAs). The proceeds of tax-exempt municipal securities generally must be invested at fair market value, and the most common way of establishing that is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality.
          According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, Wachovia engaged in fraudulent bidding of GICs, repos, and FPAs from at least 1997 to 2005. Wachovia’s fraudulent practices and misrepresentations not only undermined the competitive bidding process, but negatively affected the prices that municipalities paid for reinvestment products. Wachovia deprived certain municipalities from a conclusive presumption that the reinvestment instruments had been purchased at fair market value, and jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted.

Without admitting or denying the allegations in the SEC’s complaint, Wachovia has consented to the entry of a final judgment enjoining it from future violations of Section 17(a) of the Securities Act of 1933 and has agreed to pay a penalty of $25 million and disgorgement of $13,802,984 with prejudgment interest of $7,275,607. The settlement is subject to court approval.

Financial institutions have now paid a total of $673 million in settlements resulting from the ongoing investigations into corruption in the municipal reinvestment industry. Others charged prior to Wachovia are:

J.P. Morgan Securities LLC – $228 million settlement with SEC and other

federal and state authorities on July 7, 2011.

UBS Financial Services Inc. – $160 million settlement with SEC and other

federal and state authorities on May 4, 2011.

Banc of America Securities LLC – $137 million settlement with SEC and other federal and state authorities on Dec. 7, 2010.

In a related action to the Banc of America matter, the SEC today charged the firm’s former vice president and marketer Dean Pinard for his role in various improper bidding practices. Pinard is the beneficiary of a grant of conditional amnesty from criminal prosecution by the Department of Justice provided to Banc of America’s parent corporation. Pinard, who cooperated with the investigation, agreed to pay more than $40,000 to settle the SEC’s case without admitting or denying the findings. He is barred from association with any broker, dealer, investment adviser, municipal securities dealer, or municipal advisor.

The SEC’s investigation, which is continuing, has been conducted by Deputy Chief Mark R. Zehner and Assistant Municipal Securities Counsel Denise D. Colliers, who are members of the Municipal Securities and Public Pensions Unit in the Philadelphia Regional Office. The SEC thanks the other agencies with which it has coordinated this enforcement action, including the Antitrust Division of the U.S. Department of Justice, Federal Bureau of Investigation, Internal Revenue Service, Office of the Comptroller of the Currency, and 26 State Attorneys General.