Friday, July 20, 2012
Friday, July 20, 2012 - Why Hasn't Anything Been Fixed on Wall Street?
Why Hasn't Anything Been Fixed on Wall Street?
DOW – 120 = 12,822
SPX – 13 = 1362
NAS – 40 = 2925
10 YR YLD -.05 = 1.46%
OIL – 1.14 = 91.83
GOLD + 2.30 = 1585.00
SILV +.05 = 27.43
PLAT – 3.00= 1421.00
For quite some time it has been accepted that Greece was toast; the Greeks would be forced to swallow the bitter pill of austerity; somehow the Euro-union would survive. And the EU seemed to be dealing with the meltdown of Ireland and Portugal as well; they just forced them to pay for their own bailouts; that plan isn't working out so well with Spain. The Kingdom of Spain was supposed to be the firewall where the breakdown of the Euro-union stopped; that plan isn't working our so well. The problem today is Valencia, a region of Spain, not the orange; they are asking for a $22 billion dollar bailout; apparently in addition to the $123 billion dollar assistance package that is going to bailout Spanish banks and backed by the Spanish citizens, at least theoretically. May be good for the banks but the Spanish economy is still in a downturn and the government says it will step up austerity measures.
Spain's IBEX stock index fell 5.8 percent, its biggest one-day drop in two years, and the risk premium on government debt hit a euro-era high as its borrowing costs rose to 7.32 percent. That yield is above the 7 percent threshold considered unsustainable, with little relief in sight. And that is about 615 basis points higher than the German Bunds. Spain's 2 year bond yield is up 132 basis points from last week.
There is very little to stop Spanish bond yields moving higher at the moment. The euro fell as low as $1.21, its weakest level against the dollar since mid-June 2010, and the euro hit record lows against the Australian, Canadian and New Zealand currencies; and the lowest level against the yen in 11 years. The euro is looking like a slow motion train wreck, and there doesn't seem to be much to stop it. Every now and then we look away, but when we look back, it's just scary and the markets get shaken out of their complacency for a day or so.
Treasury Secretary Tim Geithner recently described the Euro-situation, saying: “What is very important is that (Eurozone officials) not leave the Continent hanging on the edge of the abyss as a device for getting more leverage for reform, because that leaves the rest of the world much more exposed to financial pressure and slower growth from Europe.”
First, it is a little strange to hear Geithner admit that Europe is on the edge of the abyss; strange because it's true. Germany would seem to be the most likely country in the EU to provide assistance but they don't seem to be willing to ride to the rescue; they cannot or will not prevent that disastrous scenario, either for economic or legal reasons. Germany’s constitutional court delayed its ruling to approve German ratification of the ESM, the bailout fund and fiscal compact. So, yes they are on the edge of the abyss. The final decision on the ESM and fiscal compact may not be made for several months. The Germans are opposed to bailouts, or Euro-bonds, or Euro-wide deposit insurance. Meanwhile, the bond sharks are circling around Spain and they smell blood.
The ECB and the EU may do something to kick the can down the road and usually the central bankers have been able to postpone and extend far longer than you might imagine. The news from Europe continues to be a smoldering mess, and it could be a long convoluted process before things are resolved there, or the economy could fall over the edge on any given day.
Earlier this week, Geithner forcefully defended the New York Fed's actions after it was made aware of Libor irregularities. Geithner said: “We did the right and necessary thing and we did it early.”
Maybe not. The Bank of England Says New York Fed Gave No Warning on Rate-Rigging. The call for a review into Libor in 2008 came after Mervyn King, the Head of the Bank of England and Mr. Geithner, then the head of the Federal Reserve Bank of New York, had talked about potential problems with the rate during a meeting in Basel, Switzerland, in early May 2008. This discussion was followed by a flurry of e-mails a month later in which Mr. Geithner, who is now the Treasury secretary, recommended changes to the rate, which is used as a benchmark for more than $360 trillion financial products worldwide. The suggestions included ‘‘strengthen governance and establish a credible reporting procedure’’ and ‘‘eliminate incentive to misreport,’’ according to documents released by the New York Fed. Mr. King told Mr. Geithner that he supported the suggestions. Yet, according to documents released today, the New York Fed did not make any allegations of wrongful behavior connected to Libor. Mr. King told a British parliamentary committee on Tuesday that Mr. Geithner’s suggestions did not represent a warning about the potential manipulation of Libor.
Sheila Bair, the former head of the FDIC, said, "Looking at those emails, it looks like they had pretty explicit notification of some very bad behavior, and I don't understand why they didn't investigate."
Bair said the Libor scandal exemplifies the reckless risk-taking culture on Wall Street, something she said remains despite the Dodd-Frank banking reforms. "There's still a lot of challenges on the horizon, especially on the trading desks of these large financial institutions," Bair said. "It doesn't appear that reform has really taken hold. The culture still seems to be one of excess risk-taking, perhaps ignoring the law if that means they can fatten their year-end bonuses." So, the very basic question is – why hasn't anything been fixed on Wall Street?
The California Independent System Operator, which has jurisdiction over 80% of the state's electrical transmission estimates that JPMorgan may have gamed the state's power market for $57 million in improper payments over six months in 2010 and 2011.But that could be just the tip of the iceberg: The bank continued its activities past that time frame. JPMorgan's alleged manipulation could have helped throw the entire energy market out of whack, imposing what could be incalculable costs on ratepayers.
The Federal Energy Regulatory Commission, in December accused Deutsche Bank of manipulating the California market and in March extracted a $245-million settlement from Baltimore-based Constellation Energy over charges it made manipulative trades in the New York market. (The Deutsche Bank determination is "preliminary" and subject to further investigation.) Hints of JPMorgan's behavior leaked out this month, when FERC went to court to demand unedited versions of emails it had subpoenaed from the bank. JPMorgans's response to the documents – stonewalling. The California ISO hasn't been very forthcoming with details of JPMorgan's alleged misdeeds. Its public filings don't even name the bank; it was FERC's court brief that fingered JPMorgan.
According to ISO documents, JPMorgan's scheme got discovered only because the firm was collecting so much in excessive payments that it became hard to miss. The scheme apparently involved rigging bids for electricity; this was nothing that improved the electric grid, did not help the efficent distribution of electricity; did not produce jobs; and did not add any economic value. They got greedy, real greedy. FERC says it has the legal authority to return the state's wholesale market to a utility model, in which generators would get paid only for their true cost of generation, plus a reasonable financial return. It also has the authority to place trading restrictions on JPMorgan or any other market participant it finds guilty of manipulation. No word yet on the next step.
If it all sounds familiar, that's because we've seen this movie before – it was called Enron. Basically the same sleazy deal. And you've got to wonder who the auditors are for JPMorgan? Didn't they learn anything from what happened to Arthur Anderson? And when do the enablers become just as guilty as the perpetrators? And 12 years after the collapse of Enron we're asking the question again – why hasn't anything been fixed on Wall Street?