Monday, April 23, 2012 European Debate Austerity v. Growth, Walmart in Mexico, Apple in Seattle

DOW – 102 = 12,927
SPX – 11 = 1366
NAS – 30 = 2970
10 YR YLD - .04 = 1.93%
OIL +.03 = 103.14
GOLD – 4.10 = 1639.30
SILV - .84 = 30.86
PLAT – 22.00 = 1565.00

There is some uncertainty in Europe. Sarkozy is losing the election in France; the Dutch government has collapsed, and the debt continues to mount and the austerity plans aren't working and the natives are getting restless.

In France, Sarkozy came in second behind Francois Hollande, the Socialist candidate and a harsh critic of the spending cuts prescribed as a way to end the region's debt crisis. This was the first round of voting and there will be a runoff election on May 6^th. Hollande won 28.6 percent to Sarkozy’s 27.1 percent; Hollande has the momentum. Voter frustration with the status quo and with the E.U. fed a rise of support for extremes at both ends of the political scale, making potential kingmakers out of 11 million voters who supported candidates of the far right and left.

Sarkozy and Germany's Chancellor Angela Merkel have been the main architects of Europe's efforts to avoid a collapse of the region's shared currency. If Sarkozy loses, it means Merkel might not last. If both Sarkozy and Merkel lose power, we've got a whole new situation.

Figures reported by the European Union's statistics office confirmed the effects of budget-cutting programs on countries that use the euro currency. Even with widespread spending cuts, overall debt rose to 87.2 percent, the highest level since the euro was created. Separately, a survey of the euro zone's manufacturing and services sectors fell in April. Official data confirmed that Spain is in recession, after economic output fell 0.4 percent in the first three months of the year; that qualifies as a recession although I would categgorize it as a depression. Spain joins other European countries now officially in recession, including Italy, Belgium, the Netherlands and, outside the euro zone, the Czech Republic. Even Germany may have fallen into recession in the first quarter, though official data is not out yet.

The Dutch government resigned Monday after it couldn't reach agreement with an opposition party to bring its budget deficit within European Union rules. The budget dispute raised the prospect that the Netherlands could lose its top AAA credit rating. Euro zone unity is under strain as other Europeans resent what they perceive as Germany’s holier-than-thou attitude in insisting that all the other Euro-zone countries keep their promises to reduce government budget deficits to 3 percent or less of gross domestic product. The Dutch debate basically boils down to austerity versus growth.

Christine Lagarde, the president of the International Monetary Fund, speaking in Washington over the weekend, said: “A global, undifferentiated rush to austerity will ultimately prove self-defeating.” But Ms. Lagarde also acknowledged the quandary facing European leaders. Most of them simply do not have the resources to pay for public works projects or social programs that would ease the pain of rising unemployment and declining wages.

Last week, the International Monetary Fund called for Europe to begin issuing bonds backed by all members, so-called euro bonds, a measure that would take pressure off the most debt-burdened countries whose high borrowing costs are contributing to their economic woes. In Germany, there is little support for such measures. At weekend meetings the IMF announced an additional $430 billion in lending capacity by developed economies. The contributions came after IMF economists determined that countries around the world might require up to $1 trillion in new loans because of the combined effects of the sovereign debt crisis in Europe and sluggish global economic growth. 

There are also calls for the European Central Bank to issue another round of cheap three-year loans to banks, as it has already done twice since December. The bank should also cut the benchmark interest rate from 1 percent, or resume purchases of euro zone government bonds to hold down borrowing costs. Now, the ECB can't seem to enforce deficit reduction plans in exchange for bailing out the banks. The population is catching on to the idea that the banks are part of the problem and not the solution.

The IMF has three recommendations, as outlined in last week’s World Economic Outlook, which are somewhat at variance with current euro zone policy. First, it wants the region not to overdo short-term fiscal austerity while placing more emphasis on longer-term structural measures to improve budgets. Second, it wants the European Central Bank to continue very accommodative monetary policies. Finally, it wants the euro zone authorities to be prepared to inject capital directly into troubled banks and to accompany that with stronger European-wide supervision of lenders.

When the ECB give the banks cheap money, the banks take the money and gamble – why not? It is cheap money. The banks buy the sovereign bonds and then they bet against the same with Credit Default Swaps. For the banks, the best bet is that the economy will shudder and shake and quake and maybe default. And to aid in the bet, the banks are not lending out the cheap money they received from the ECB.

Just a reminder that the Greeks hold an election on May 6, the same day as the runoff in France. Surely the Greeks are looking at the Dutch indignation regarding austerity. The same Dutch that demanded Greek leaders submit to EU demands for punitive austerity measures or forget about getting any help to avoid bankruptcy.

From Reuters: A former chief executive of Calpers, the biggest U.S. public pension fund, and a former board member were charged by federal regulators on Monday with scheming to defraud Apollo Global Management, a private equity firm, of more than $20 million in placement fees.

The U.S. Securities and Exchange Commission said that Federico Buenrostro, a former chief executive of the California Public Employees' Retirement system, and Alfred Villalobos, a friend and former board member who became a placement agent, fabricated documents as part of the fraud. Villalobos is also a former deputy mayor of Los Angeles.

Investment firms hire placement agents to help them land business at pension funds. According to the SEC, Buenrostro and Villalobos, gave Apollo Global the impression that Calpers, which has $235 billion in assets, had reviewed and signed placement-agent fee disclosure letters in accordance with its procedures.

"In fact, Buenrostro and Villalobos intentionally bypassed those procedures to induce Apollo to pay placement agent fees to Villalobos's firms," the SEC said in a statement. "The false letters bearing a fake Calpers logo and Buenrostro's signature were provided to Apollo, which then went ahead with the payments."

Villalobos generated more than $70 million in placement agent fees over approximately a 10-year period, at least $58 million of which was related to Calpers' investments, according to the SEC.

Buenrostro served as Calpers' CEO from 2002 to 2008.

From the Murdoch Street Journal: In a letter set to be sent to regulators and lawmakers on Monday, an MF Global customer group calls for J.P. Morgan to “return hundreds of millions of dollars in MF Global customer funds transferred” to J.P. Morgan in late October. The group, called the Commodity Customer Coalition, urged U.S. officials to “demand” that the New York bank “disgorge all MF Global customer property immediately.” J.P. Morgan is cooperating with the ongoing investigation, has said it did nothing wrong and lost some of its own money in the Oct. 31 bankruptcy because it was a creditor of MF Global.

Next up, we have two tales of corporations performing badly. We start with Walmart. Walmart, has just been caught in a massive bribery scandal that extends to the highest levels of the organization. Just as bad, Walmart's senior management appears to have long known about the scandal and has deliberately tried to cover it up. About 20% of all Walmart stores worldwide are in Mexico.

Walmart de Mexico apparently bribed Mexican officials for years; the bribes may have totaled more than $24 million and they were paid to win permission to open new stores without having to go through regular legal channels. The bribes were initially hidden from Walmart's global headquarters in Bentonville, Arkansas, by disguising them as normal legal bills, which would be accounting fraud. One of the key executives in charge of the bribery payments quit the company in 2005 after being passed over for promotion. He then detailed his behavior to some of Walmart's lawyers, implicating many senior Walmart executives in the process. The CEO of Walmart de Mexico is said to have personally approved the bribes. Walmart's global headquarters launched an investigation of the bribes but despite finding evidence of suspicious behavior and possbly clear violations of law, they shut down the investiagtion. Walmart's then-CEO, H. Lee Scott, Jr., was briefed on the investigation. He reportedly rebuked the company's investigators for being too aggressive.Walmart's current CEO, Michael Duke, was chairman of Walmart International at the time of the scandal. He received frequent briefings about the bribery allegations and progress of the investigation.

The Foreign Corrupt Practices Act makes it illegal to bribe officials in countries in which American companies do business, which is what Wal-Mart is accused of doing here. And don't forget the accounting fraud.

Our next example of a corporation behaving badly is Apple. A guy from Seattle named Rex sued Apple and won. He kept a blog of his battle. Here is the quick version. In 2008, Rex bought an Apple laptop was part of a batch that contained a defective chip. Apple acknowledged the defect and said it would replace it when it burned out. When the chip burned out three years later, Apple flaked out; they claimed his computer was a slightly different version than the model for which it had agreed to replace the chip. So, this guy, Rex, goes to the Apple store, he mails letters, he makes phone calls and he keeps meticulous records of everything, and he writes a blog about his experience. And finally, in March he ends up in small claims court and he wins. David beats Goliath.

If it sounds like a heck of a lot of work and hassle for a computer repair – it is. And that is what Apple was counting on. They thought they could just wear the guy down and eventually he would quit. Most people would give up. Who could blame them? In the past, wronged customers could band together and file a class-action lawsuit. The whole reason why class actions were set up is because most Americans don’t have time or money to go to court over a small item. But today, most companies have added clauses to their customer contracts that prohibit class-action suits. Instead of class action, the corporations now have contracts that mandate arbitration. The problem with arbitration is that customers lose 95% of the time. Coincidentally, the arbitrators are selected by the companies.

So, Rex sued Apple and took them to small claims and Apple fought back. They sent two attorneys to fight the battle, even though it was pretty clear they were liable for the defective chip. They probably thought they could wear the guy down, that he might not show up, or that he might slip up and not be prepared. Maybe Apple was just trying to be a bully. Now the guy is entitled to a new computer and Apple has to pay their attorneys. Once upon a time, Apple was the scrappy underdog, throwing a hammer through the window of conformity. Those days are gone. Apple is now a monolith that thinks the legal system is there to serve them; and customers are meant to be beaten into submission. And they do it for the worst possible reason: because they can. It is only a matter of degrees between screwing one guy in Seattle, screwing the Mexicans who live near a Walmart, screwing the clients of MF Global, screwing the pensioners in California, screwing Europe. And everybody is doing it.

Sinclair Noe

Eat the Bankers