Accepting Unacceptable Manipulation or Dude, What Happened To My Pension?
-by Sinclair Noe
DOW + 78 = 12,805
SPX +10 = 1363
NAS + 13 = 2910
10 YR YLD +.04 = 1.50%
OIL - .21 = 89.01
GOLD – 6.20 = 1583.40
SILV unchanged = 27.41
PLAT + 1.00 = 1424.00
Federal Reserve Chairman Ben Bernanke went to Capitol Hill today. He made some remarks; he took some questions; he did not surprise. Bernanke said in his testimony:"Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to economic growth, the committee made clear at its June meeting that it is prepared to take further action."
Prepared to act but not acting right this moment. Nothing new. If you were looking for a signal, you didn't really get it.
Bernanke said the risks of a surge in inflation were low and that there was a modest risk of a broad-based decline in prices.
Bernanke said the Fed could also use communications tools, such as extending its pledge to hold rates exceptionally low. He cited the possibility of additional bond buying -- whether Treasury debt or mortgage-backed securities -- lending through the Fed's emergency loan window, and lowering the rate the Fed pays banks on reserves held at the central bank. Which is almost a new idea. Holdings of cash and other liquid assets at US industrial corporations rose to $1.7 trillion in March 2012; that's cash held in short-term and low-risk instruments, which is what the Fed has been selling to buy longer-term as part of its Operation Twist.
He said recent deterioration in the labor market suggests the nation's 8.2 percent jobless rate will come down all too gradually, saying for the first time the softness in hiring could not be explained away by purely seasonal factors. He said Fed policymakers would consider a range of tools to further stimulate growth if it became clear the labor market was not improving or if deflation risks mounted. So, apparently, when the labor market is bleeding on Bernanke's shoes, then he'll consider pulling out the tourniquet. At some point, the Fed will dig into their toolbox but Bernanke was not going to disclose much to the politicians.
Bernanke told the committee that manipulation of the Libor by banks and traders had undermined confidence in financial markets, and he called the process of calculating Libor "structurally flawed." However, he said the Fed had limited authority to force changes since Libor was overseen by the British Bankers' Association; which is completely stupid. The Federal Reserve is the regulator for the US banks that report the daily Libor rates.
And then during the Q&A it went from stupid to sublime. A senator, referencing Libor, asked Bernanke what he thinks about the evils of rate manipulation. Bernanke said: “it was unacceptable behavior.” And then he went on to explain, saying: “the manipulation of rates was a little bit low by certain banks but they just wanted to show they were healthy during the crisis.” So, we're clear on what Bernanke said, rate manipulation is unacceptable, which is the very thing the Federal Reserve does every six weeks or so when the FOMC meets to manipulate interest rates; and rate manipulation is unacceptable, except when a bank wants to lie about its financial health to the general public and to investors, or maybe if they have a side bet on some interest rate swaps.
I need to pause briefly and allow my brain cells to get un-twisted.
The rot is systemic.
Also on Capitol Hill today, a hearing by the Senate Permanent Subcommittee on Investigations released a 400-plus-page report detailing how the British bank, HSBC routinely acted as a financier to clients routing funds from the world's most dangerous corners, including Mexico, Iran and Syria to facilitate money laundering. HSBC's top compliance officer announced he was stepping down and that the bank will shut down businesses in secret havens such as the Cayman Islands. Several senators were less than convinced, especially since HSBC has been caught doing this repeatedly and they have promised to change their ways repeatedly and they keep breaking the law repeatedly.
The Senate report said HSBC had little oversight of client accounts housed in a shell operation in the Cayman Islands, well known for offering secret accounts and a limited tax regime. By 2008, the Cayman accounts held $2.1 billion. The Senate report alleged that HSBC did regular business in risky areas tied to drug cartels, terrorist funding and tax cheats. It detailed how between 2007 and 2008, HSBC's Mexican operations moved $7 billion into the bank's US operations. Both Mexican and US authorities warned HSBC that the amount of money could only have reached such a level if it was tied to illegal narcotics proceeds. The report also criticized the Office of the Comptroller of the Currency, which is supposed to regulate banks for money laundering compliance.
HSBC is still facing a Justice Department investigation with potential fines topping $1 billion. Senator Carl Levin suggested the bank's charter could be at risk if it did not do better. I mean that is an interesting idea. When banks repeatedly break the law, again and again and again and again and again, maybe they should be punished. Maybe they should not be allowed to continue in their illegal enterprise. I mean that is just clever as hell. Maybe we should enforce the laws. Why didn't somebody think of that before?
The better question may be whether the financial industry can make it through one day without a fresh new scandal. Look at the recent list: JPMorgan's London Whale, Barclays' Libor, a few other banks can jump on that mess, Peregrine Financial, JPMorgan Credit Default Swap criminal probe and first quarter repricing, UBS mispricing of CDS, New York Federal Reserve Bank failure to regulate in the face of Libor manipulation, Wells Fargo fined, the former Citigroup manager facing fraud trial in New york trying to explain that the CDO is gambling but its legal gambling, and then there is the HSBC money laundering report.
And then we get a couple of reports today stating that corporate and public pension funds across the country are seriously underfunded, threatening the retirement security of workers and straining the already tapped finances of state and local governments. A report by the S&P Dow Jones Indices says there are record high shortfalls in corporate funds needed to pay for pensions and related post-employment benefits. Companies were underfunded by an estimated $578 billion, meaning they had only 70.5% of the money needed to meet retirement obligations. The American dream of a golden retirement for baby boomers is quickly dissipating. The cost of retirement is turning out to be out of reach for older workers and growing more expensive for younger ones.
Meanwhile, a separate pension-related report issued by the State Budget Crisis Task Force warned that public pension funds are underfunded by $1 trillion to $3 trillion, depending on who's making the estimate. The states also are short about $1 trillion in money needed to meet promises to pay for healthcare for government retirees. The report says the California pensions collectively now face a $136-billion unfunded liability. The report says: "The ability of the states to meet their obligations to public employees to creditors and most critically to the education and well being of their citizens is threatened."
How has it been possible for banks to grow from less than 4 per cent of the global economy to more than 12 per cent of the global economy without impoverishing others? How has it been possible for profits in the financial sector to be consistently higher than profits from other human endeavors with more tangible products or impacts on our daily lives - such as agriculture, transport, health care or utilities? How has it been possible that banks derive their profits not from the protected and regulated activities of deposit-taking and lending, but from the unsupervised and often unknowable escalation of off-balance sheet assets and liabilities? How has it been possible that pension savings have increased while pension returns have declined to the point where only bankers can expect a comfortable old age? Global banks have built the casinos and tilted the odds in the house's favor by rigging the data that determines the outcomes of most of the bets on the table. Every one of us that sits at the table long enough - whether saver, investor, borrower, taxpayer or pensioner - will be a loser. It is not a flaw; it is our financial system.