Monday, July 9, 2012

Monday, July 09, 2012 - Barclays Did Not Act Alone - Reaching Into the Upper Echelon

Barclays Did Not Act Alone - Reaching Into the Upper Echelon
-by Sinclair Noe

DOW – 36 = 12,736
SPX – 2 = 1352
NAS – 5 = 2931
10 YR YLD -.03 = 1.51
OIL -.34 = 85.65
GOLD + 4.90 = 1588.30
SILV  + .24 = 27.44
PLAT – 2.00 = 1449.00

Alcoa kicked off the second quarter earnings reporting season. Alcoa has the ticker symbol AA and they are one of the 30 stocks in the Dow Industrials, so they start the earnings season based on alphabetical order and size and a little bit of tradition. Alcoa lost $2 million for the quarter. With an overhang of high inventories and a 20 percent drop in prices since March, many aluminum producers are losing money. Excluding items, also known as the cost of doing business, Alcoa earned $61 million from continuing operations, or 6 cents per share, which topped estimates of 5 cents per share. Later this week we'll have earnings reports from some of the big banks, so it seems appropriate that Alcoa start earnings reporting season with some flashy accounting. Based upon this loss, they will probably get a tax refund. 

President Obama called on Congress to extend tax cuts for families earning less than $250,000 a year while allowing taxes to rise for households making more.

Obama said: “Let’s not hold the vast majority of Americans and our economy hostage while we debate the merits of another tax cut for the wealthy.”

Obama wants Congress to pass a one-year extension of the Bush-era tax cuts for households making less than $250,000 before they expire at the end of the year. He said the outcome of his November election contest with Republican rival Mitt Romney would then determine the fate of the tax cuts for higher income earners. The Census Bureau estimates that out of 118.7 million U.S. households in 2010, about 2.5 million had incomes of $250,000 or more. Romney supports extending the tax cuts for all income earners. His campaign spokeswoman says that Obama’s proposal amounted to a “massive tax increase.” Of course the Democrats and Republicans are sharply divided on this one, so they're going to drive that same old truck right back to the edge of the fiscal cliff.

Britain’s Serious Fraud Office says it has formally opened a criminal investigation into the Barclays rate rigging scandal. Bank of England Deputy Governor Paul Tucker faced questions from the UK Treasury select committee over claims Barclays was encouraged to manipulate rates. Tucker completely rejected suggestions that government ministers had pressured him to encourage banks to manipulate Libor. He said the Bank of England was not aware of Libor manipulation, or any allegations of dishonesty, despite chairing a meeting that discussed the low-balling of Libor in 2007. Tucker counters that he thought they were talking about banks misunderstanding one another, not "cheating". Asked whether Libor is clean now, Tucker says: “I can't be confident of anything after learning about this cesspit.”

This is front page news in London. The Economist magazine had a dramatic cover this weekend, it reads: “Banksters, Britain's price-fixing scandal and its global impact.” In typical Economist style they recommend a go-slow approach to investigating the problem; drag it out and hope the masses become distracted. 

The US media hasn't touched the story, but it will almost certainly affect us. Wall Street will be implicated in the scandal. The biggest Wall Street banks – including JP Morgan Chase, Citigroup and Bank of America – were almost certainly involved in rate rigging the Libor. Barclay's couldn't have rigged the Libor without their involvement. Barclays' defense has been that every major bank was fixing Libor in the same way, and for the same reason. Barclays is co-operating with the justice department and other regulators; rolling over on their competitors. US regulators would have to be incredibly incompetent for this not to result in steeper penalties and criminal prosecutions – and this is a possibility, but really, we should see perp walks. 

In 2007, Barclays and other big banks submitted false Libor rates; manipulated to make the rates look lower in order to give the impression they still had financial strength. The next question is whether the Federal Reserve, administration officials and regulators were aware of this manipulation and complicit, or unaware and incompetent. Research papers indicate the Fed was aware of and worried about Libor manipulation as early as February 1998 but there is no indication they took any actions. The scandal is already moving into the upper echelon of British government; it would be naive to imagine it didn't reach into US government. 

The other part of the scandal is that Barclays traders were manipulating interest rates so they could place bets in the derivatives markets using customers deposits; this is more egregious than insider trading; it is out and out cheating. And Barclays traders were not the only big bank traders who were cheating; and this was cheating in an enormous market, more than $800 trillion dollars per year over several years. 

So far, there has been no movement to clean up the mess in the cesspit; not a single top financial executive has been charged with a crime in connection with the meltdown of 2008. Rather, the banks were bailed out, the bankers got bonuses, the lobbyists were paid handsomely to prevent any regulation from slowing down the pillaging. We know that the big banksters have been stealing at an unprecedented pace but they remain unfettered by conscience or law or public outrage. 

That is simply criminal. The system has failed. More evidence of that this weekend when confidential emails were revealed  from Swiss bank giant UBS. The advice, in a note titled "Reducing Libor, improving lending conditions", was sent from UBS to the British Treasury at a time when lending between banks had all but dried up over fears they might collapse. The Labour Party claims the document, published in the Financial Times, "simply proposes legitimate policy improvements" to reduce the cost of banks lending to each other during the credit crunch. Part of the problem is that banks now instruct the Treasury how to conduct business and this is considered legitimate policy. Legitimate policy is representing the people, not supporting schemes to defraud the people. 

And since we didn't fix the problems of the past five years, this next round of corruption will be bigger and more painful. The problems are coming around again, and just like the last time, the US media is oblivious. In a couple of years, they'll be telling us how nobody could have anticipated what happened. I can’t give you an exact time-line or specifics of how this will play out.  Eventually, this tsunami will reach our shores, and this time, it looks like a big one. 

Meanwhile, Euro-zone finance ministers are meeting this week in Brussels to try to figure out something to do with Spain. The interest rate, or yield, on Spain’s 10-year bonds hit 7 percent, a level that market-watchers consider is unaffordable for a country to raise money on the bond markets in the long term and the point at which Greece, Ireland and Portugal all sought an international bailout.

Greek Prime Minister Antonis Samaras won a vote of confidence in his new government, setting the stage for a showdown with the European Union over easing the terms of its bailout.

Four top Federal Reserve officials made speeches today, three of the Fed heads were laying the groundwork, for the possibility of more quantitative easing. San Francisco Fed President John Williams speaking in Idaho said: "We are right at that edge, that if economic data keep coming in below our expectations -- and our view is we are not making progress on our mandates, or we don't expect to make progress on our mandates -- then I think we would need more accommodation.”

Speaking in Bangkok earlier Chicago Federal Reserve Bank President Charles Evans said: "Additional monetary accommodation is needed to more quickly boost output to its full potential level. The economic circumstances warrant extremely strong accommodation."

Boston Federal Reserve President Eric Rosengren said: “So far data has been coming in weak and I gave a weak forecast myself. I think it's appropriate to have more quantitative easing."

Richmond Fed President Jeffrey Lacker reiterated his opposition to a new round of stimulus.

The Fed next meets to discuss policy on July 31 to August 1, and then on September 12 to 13. All four Fed officials speaking today noted the threat to the U.S. from Europe's crisis, and even Lacker, the policy hawk, said he was not worried about inflation.

So, 3 out of 4 Fed officials today are calling for QE3. The dissenter was Federal Reserve Bank of Richmond President Jeffrey Lacker. Today, in a radio interview, Lacker said the US may already be close to maximum employment from a monetary policy standpoint and that policy makers can’t do much more to cut the jobless rate.

Lacker said: “Given what’s happened to this economy, I think we’re pretty close to maximum employment right now. That might be shocking. That might be surprising.” Yep, in fact Lacker might be stupid. 

Granted, the Fed probably has limited control over the jobless rate because the employment level is driven by “non-monetary factors that affect the structure and dynamics of the labor market,” according to the January statement from the Federal Open Market Committee. 

Lacker, who has dissented from all four FOMC decisions this year, is at odds with colleagues on what the Fed should do to boost the economy. He said in a June 22 statement that he opposed the FOMC’s $267 billion extension of its Operation Twist program because it may spur inflation and won’t give the economy a significant boost. QE might not be the right solution but Lacker has the reasoning all screwed up. 

The world has simply gotten itself into too much debt. There are creditors that expect to be paid, and debtors that are having an increasingly difficult time making payments. No amount of political or policy intervention is going to change that reality. Americans put more on their credit cards in May than in any single month since November 2007, but overall credit card use is still well below where it was just before the downturn. Consumer borrowing rose by $17.1 billion in May from April. The gain drove total borrowing to a seasonally adjusted $2.57 trillion, nearly matching the all-time high reached in July 2008. Borrowing has increased steadily over the past two years, but most of the gains have been driven by auto and student loans, which rose to a record level of $1.7 trillion in May.

The Consumer debt is just a small part of the big picture. Markets now trade more than $800 trillion a year in Libor related derivatives; that's 12 times more than the Gross Domestic Product of the world. The reckless use of leverage has resulted in a chasm between total credit and the money that can service it.

So how will this debt overhang be resolved? The Central banks will attempt to deleverage, or unwind the debt, by printing money, and lots of it. There are two ways to deleverage. One is to let credit deteriorate on its own in the marketplace, essentially through default. And the other is to manufacture new currency or bank reserves. Those are the only two ways to deleverage a balance sheet.

What policy makers do not want to see is bank asset deterioration, or default. That is not the preferred central banker method because banks fail and bank systems fail; creditors and debtors fail and it would just feed on itself in an accelerating fashion. And so monetary policy makers have no choice but to deleverage in the other way, which is to print money; to manufacture electronic credits and call them bank reserves.

If you want to get a gauge of the economic pulse of the globe, just take a quick look at the central banks. Last week the ECB cut rates, the Bank of England announced it would pump billions into the system. The People's Bank of China announced the second rate cut in a month. When it comes to the global financial system, all countries are eventually interconnected. The primary job of a central bank is to lend money – or to provide liquidity. Yet a lack of liquidity is not the major problem of our times. We are suffering from a lack of demand. 

Morgan Stanley has been tracking stock trades for the past 10 years and they've learned that only 16% of the stock market is traded by flesh-and-blood human beings. Computerized high-frequency trades (HFTs) dominate the other 84%. These trades, known as “black box” trades, are governed by complex algorithms that analyze data and transact orders in massive quantities faster than you can blink.

What if we had a stock market and nobody gave a damn?

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