Wednesday, May 16, 2012 – Admit Nothing – by Sinclair Noe

DOW - 6.66 = 12,496

SPX + 2 = 1318
NAS + 11 = 2850
10 YR YLD -.07 = 1.72
OIL +.62 = 90.51
GOLD – 6.00 = 1563.30
SILV -.36 = 27.94
PLAT – 20.00 = 1430.00

A listener writes: Maybe they should have renamed the company "Two Facedbook" at the IPO for all of the double dealing and back door insider information. One face for Joe public and the other face for Joe privileged... My .02 worth.

We are learning details, and we will learn many more details as the Facebook Fiasco works its way through the courts. Zuckerberg made a boatload of money but he will spend a large part of his life dealing with lawyers and the legal system. At first blush it appears the bankers were behaving badly. Go figure.

The latest revelation is that Facebook officials told the analysts for the banks that were underwriting the IPO to reduce revenue and earnings forecasts. Facebook backed off and said, “hey, get your models down.”

Facebook's advisory came around May 9, the day it published an amended prospectus that included a cautionary note about lower advertising revenue. It isn't known which analysts from the 33 IPO underwriters were contacted by Facebook with the revised guidance. It also isn't clear exactly who from Facebook gave the guidance. The analysts cut their estimates because a Facebook executive told them to. The information about the estimate cut was then verbally conveyed to sophisticated institutional investors who were considering buying Facebook stock, but not to smaller investors. The estimate cut appears to have influenced the investment decisions of at least some institutional investors, dampening their appetite for Facebook stock, and crucially affecting the price at which they were willing to buy Facebook stock. Now, Facebook is reportedly looking to relist with the NYSE because they don't like something about the original listing through Nasdaq. I don't think there is much difference.

Facebook’s tagline ironically is, I believe, to promote a more open, transparent and connected world.

Federal and state regulators are looking into various issues surrounding the Facebook IPO; which is another way of saying nothing will happen.

There was actually a hearing last week that examined the “Settlement Practices of U.S. Financial Regulators” which revealed that regulators almost universally reach settlement without requiring an admission of wrongdoing. The General Counsel of the Federal Reserve admitted during the hearing that in the past 10 years only seven of the roughly one thousand enforcement actions were resolved without consent.

The reason for the slap on the wrist approach? Well the Fed says: “Requiring admission of fact and legal conclusions as a condition of entering into a consent action is likely to have a deleterious effect on our supervisory efforts by causing more institutions and individuals to challenge the requested relief in contested administrative proceedings, which typically takes years to reach final resolution, and which could delay implementation of necessary corrective action.”

So, the Fed will only punish banks who break the rules if those banks agree to be punished, otherwise it's just too much work.

Another regulator, the SEC, finally found some examples where it might not be appropriate for corporate evil-doers to deny wrongdoing. The SEC says that if a company has already admitted guilt in a criminal proceeding, then the SEC will request that they are not allowed to deny wrongdoing in a parallel civil proceeding.

Of course the banksters complain bitterly that they are stymied by regulation and a justice system that treats the banker who steals millions with kid gloves, while the man who steals a loaf of bread is left with no settlement but a guilty plea. Victor Hugo is laughing at us all.

MF Global argued in a December 2010 letter to regulators that futures brokers didn’t need tighter restrictions on how they invest client funds. Ten months later, as MF Global filed for bankruptcy, about $1.6 billion in customer accounts was missing; vaporized.

Within weeks, regulators approved a measure, dubbed the “MF rule,” designed to limit the kinds of transactions firms could make using client funds. The rule had been on the regulatory backburner as lobbyists sought to stall or alter new curbs proposed after the 2008 financial crisis. An army of lobbyists can sometimes succeed in rolling back or delaying rules and regulations to the detriment of investors and depositors, with rippling effects on the broader economy. However those regulations sometimes protect the businesses from self-inflicted damage.

In a few weeks there will be another election in Greece, provided there is still a Greece in a few weeks. The last elections, a couple of weeks ago, produced a hodge-podge of far left and far right politicians, and one left leaning voices by the name of Alex Tsipras, who has traveled to Germany and France to try to negotiate a way for Greece to remain in the Euro-union while not forcing the populace to a draconian austerity plan. Both newly elected president of France, François Hollande, and the German chancellor, Angela Merkel, refused to meet with Tsipras, who offered one explanation: “We wanted an exchange of ideas and we realized that those who are afraid of dialogue are not prepared to discuss, perhaps because they have a guilty conscience.”

So, now we are being told to get ready for a Euro-union without Greece. Leniency will not be tolerated. The Eurogroup Working Group, which is a group of experts who work for the Euro-bloc group of finance ministers are advising Euro-countries to come up with contingency plans for a Greek exit. It all looks like a big game of poker, and someone is bluffing. Maybe.

The Belgian Finance Minister said: "All the contingency plans (for Greece) come back to the same thing: to be responsible as a government is to foresee even what you hope to avoid."

The German Bundesbank said a euro exit would pose "considerable but manageable" challenges for its European partners.

Bloomberg reports: “Europe’s banks, sitting on $1.19 trillion of debt to Spain, Portugal, Italy and Ireland, are facing a wave of losses if Greece abandons the euro. While lenders have increased capital buffers, written down Greek bonds and used central-bank loans to help refinance units in southern Europe, they remain vulnerable to the contagion that might follow a withdrawal, investors say. Even with more than two years of preparation, banks still are at risk of deposit flight and rising defaults in other indebted euro nations.”

I don't know where they came up with the $1.19 trillion dollar figure, but it sounds very official. I think nobody really knows what a big mess it might be.