Monday, May 21, 2012

Monday, May 21, 2012 - Markets Bounce, Greece Doesn't, JPMorgan Stonewalls - by Sinclair Noe


DOW + 135 = 12,504
SPX + 20 = 1315
NAS + 68 = 2847
10 YR YLD +.03 = 1.74%
OIL + .12 = 92.69
GOLD +.30 = 1593.40
SILV -.25 = 28.57
PLAT + 13.00 = 1474.00

Remember last summer, when the living was easy and the Dow Industrials dropped like bricks from 12,724 down to 10,719? Two-thousand points in just a few weeks? Remember in October, the Dow had recovered from the Dog Days of Summer and climbed all the way back to 12, 078, only to fall more than 800 points in just a couple of weeks? The past three weeks have been kind of like that. Of course, there will be bounces. Today we bounced. Why did we bounce today? Make up any reason you wish. Europe didn't collapse, Greeks shifted to a pro-bailout party, the Facebook frenzy is finished, Jamie Dimon hypnotized investors to forget about losses at JPMorgan, the G8 is feeling optimistic, China isn't planning to crush the US economy - at least not this week; the sun was eclipsed by the moon but it was only temporary. Pick a reason or create your own. Stocks bounce. One day does not make a trend.


Over the weekend the G8 met at Camp David. It might have made better sense to hold the meeting in Chicago, where NATO was holding a meeting, a rare United States based NATO summit, but there would have been too many protesters. So the G8 met in the wooded seclusion of Maryland and they decided they would like to keep Greece in the Euro-Union. German Chancellor Angela Merkel thought it might be nice to let the Greeks vote on the idea. Apparently, there was a push to focus less on budget cuts and other austerity measures and more on ways to lift economic growth in the euro zone. Merkel has said she is not opposed to jointly underwritten euro area bonds, but believes it can only be discussed once the conditions are right, including much closer economic integration and coordination across the euro zone, including on fiscal matters. That remains a long way off. There is no rush for Merkel and Germany; so far this Euro-crisis is working out nicely for them.

In some ways, the withdrawal of deposits from banks in the periphery of the euro-zone is simply a slow motion version of a good, old fashioned bank run. In this case the money is running from Greece, Spain and Italy to Germany. The run is being caused by concerns about exchange rate risk, not necessarily by the fear of bank failure. This makes it much more complicated to deal with, since it is very difficult to offer guarantees against future exchange rate losses to today’s depositors. Germany would not want to stand behind such guarantees to Greek and Spanish citizens in the event of a euro break-up.

This whole austerity debate is playing out in bizarre slow motion. In Ireland, austerity has been the chosen path. The Irish bought into the austerity program; they raised taxes, they cut spending; they were the very model of a modern major belt-tightener. And now the Irish banks are forcing the government into a new round of bailouts and loans.


If you're wondering why Greece has such a huge effect on global markets, the answer is that it doesn't. We've been told that the problems in the Euro-zone are because of Greece and the possibility of Greek-like problems infecting the rest of the Euro-zone. We've heard the morality play of the lazy Greeks and the industrious Germans being asked to foot the bill. Adam Posen is a member of the Bank of England's Monetary Policy Committee; Posen placed the blame for the euro-zone debt crisis on “insufficiently capitalized” banks, calling for more efforts to evaluate their risk profiles and temporary nationalization of the weakest financial institutions.

Posen says: The source of our current problem is not Greece. The sources of our current problem in the euro area are the various financial exposures that we all have in the interbank market that have not yet been resolved because…institutions remain insufficiently capitalized and insufficiently disciplined.”

Economist Jeffrey Sachs says the euro zone crisis is now an immediate banking crisis; Greece, like Spain, is mainly suffering from “chronic lack of working capital.” Apparently the solution is...,

I'll wait for you to catch up here.

Just to recap, Greece has an economy about the size of Maryland. Greece is not the problem. The problem is the banks don't have enough money, and so the answer is...

Bailout the banks. Get in a helicopter and throw money on the banks. Yes, the problems in Greece and Ireland and anywhere else all have one answer – more money for the banksters. Turns out the euro zone’s financial “firewall” may need to be boosted to reassure markets that neither Spain nor Italy would be allowed to default on their debt during any market panic that might follow an eventual Greek exit. The exact amount of a big bank bailout hasn't been determined but they've already burned through more than $1-trillion, so best estimate is that it will be much more.

So, the longer the Greek tragedy plays out, the more money will need to be poured into the interbank market to insure solvency. The problem is that it is very difficult for the Greeks. After five years of depression, the Greeks fired their mainstream political parties and voted for communists on the left and neo-nazi's on the right. The Golden Dawn political machine includes roving gangs of thugs that routinely beat up immigrants, and its political platform includes placing mines on the border between Greece and Turkey to prevent immigrants from coming into the country. Golden Dawn only got 7% of the vote. The Greeks think that the system is rigged against them, which it is.  It was German and French banks who lent Greece huge sums of money, and Goldman Sachs that helped the government lie about its debt load. The overwhelming majority of Greek voters don't want neo-nazi's, but at least 7% felt that was preferable to having corrupt banksters looting the country. Austerity produces extremism.


Jamie Dimon spoke this morning to a financial-services conference organized by Deutsche Bank in New York. Dimon said JPMorgan will continue to pay dividends but they will stop the stock buyback program, but not because of the proprietary trading CIO losses of $2 billion, or $3 billion, or maybe $5 billion, or maybe more. Actually, Dimon refused to give an accounting of the losses from CIO trades. Dimon said: “We are not going to give a running tally on losses, so don’t ask me that.”

So, what have we learned in the past five years of financial crises? That the banks were poorly regulated, or essentially unnregulated? That the banks were over-leveraged? That the banks made wild and stupid bets? Well, yes. But the big lesson is that when the bankers have problems, they will lie, and if they don't have enough information to lie, they will stonewall. What did Jamie Dimon, the bank’s chief executive, and Doug Braunstein, the chief financial officer, know and when did they know it? Were JPMorgan’s first-quarter earnings accurate? Were top JPMorgan officials misleading when they discussed the chief investment office’s investments? JPMorgan changed a critical measure of Value at Risk during the first quarter – why? Was that information timely disclosed? Were positions being marked correctly?

And the answer is:”Don't ask me that.” Oh, all righty then,



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