Friday, August 17, 2012 - We All Want Justice but You've Got to Have Money to Buy It

We All Want Justice but You've Got to Have Money to Buy It
-by Sinclair Noe 

DOW + 25 = 13,275
SPX + 2 = 1418
NAS + 14 = 3076
10 YR YLD -.02 = 1.82%
OIL + .61 = 96.21
GOLD + 1.10 = 1616.80
SILV - .13 = 28.19 
PLAT + 34.00 = 1479.00

We had a bunch of economic reports this week. Here's a quick review:
The Consumer Price Index, or CPI, measures inflation at the retail level; in July the overall consumer prices were unchanged, while the core gauge rose 0.2%. The CPI rose 1.4% over the year through July, the smallest 12-month change since late 2010. 

The Producer Price Index, or PPI, measures inflation at the wholesale level; it rose 0.3% in July. Higher  food prices were only slightly offset by lower energy prices. In the 12 months ending in July, producer prices rose 0.5%, the smallest gain since October 2009.  However, food prices jumped, with corn prices leading the way, up 34.5% for the month. That will filter through the economy. Energy prices were down in July, but they've been moving higher. Inflation is not a problem right now, but wait. 

Initial filings for unemployment benefits climb by 2,000 to 366,000 in the latest week, but the four-week moving average dropped to its lowest level since March. While the July unemployment figure rose a tenth of a point from June to 8.3 percent, the government says 44 states saw their jobless rates increase. Nevada has the highest unemployment rate at 12%. California added 25,000 new jobs but the unemployment rate is still the third highest at 10.7%. Arizona matched the national rate at 8.3%.

Housing starts dipped in July after builders broke ground on the most new homes and apartments in nearly four years in June. Building permits stood at the highest in four years. If you want to identify a bottom in the housing market,  the first thing is to see some construction activity, like housing starts, new home sales and residential investment, which goes to inventory; then you look for a move in home prices; it's an old story of supply and demand.

The University of Michigan consumer sentiment index increased to 73.6,  the highest level since May, from a final July reading of 72.3. The economists who prepare the report say they don't expect a big change because Americans still face strong headwinds such as poor job prospects, a bad housing market, rising student loan debt, and a lack of faith in political institutions. 

The Conference Board said the index of leading economic indicators fell 0.4% in June; indicating sluggish growth through the end of the year. 

A growing list of economists are all pretty much  putting 50/50 odds on new action from the Federal Reserve at the central bank’s September 12-13 policy meeting.  Plenty of analysts think the Fed will still launch a third round of quantitative easing in the coming months, but the timing is the question.

Markets are calm, while equities approach their highs of the year.  Fed policymakers generally concede that asset purchases are most effective in times of financial instability. The ability of QE to boost growth and generate jobs has been more challenging to prove. To the extent financial markets are functioning normally, balance sheet expansion becomes a tougher sell.

Increasingly, it appears the majority of FOMC participants don't seem to think that the unemployment rate will improve that quickly, but it is not at all obvious that the pace of the recovery is inconsistent with the FOMC's view of achieving its dual mandate. It sounds as though the Fed has given up; they done what they can; they can't think of more to do; they're not going to try; they're not going to risk even a bit of inflation, not with a drought hanging over the food supply and who knows what hanging over the oil supply; and the closer they get to the election the more likely they are to do nothing, afraid of seeming political, even though doing nothing is super-charged with political implications; and they seem to be willing to accept the new normal; and this is despite assurances from Bernanke and others that the Fed is not out of bullets. I've heard the expression “don't fight the Fed” but what happens when the Fed won't fight? I guess we just drift through the Dog Days of Summer. We'll see.  

It could be worse I suppose. The S&P 500 held near a four year high. Volume was very light, again but it closed up for a sixth straight week, and the volatility index, the VIX, hit a five-year low of 13.43. 

It finally looks like regulators are going to crack down on MFGlobal. The New York Times reports the criminal investigation is heading into the final stages: “authorities are seeking to interview the former chief of the firm, Jon S. Corzine, next month, according to the people involved in the case. Authorities hope that Mr. Corzine, who is expected to accept the invitation, will shed light on the actions of other employees at MF Global.” Corzine is the former CEO of MF Global and the former CEO of Goldman Sachs. This is apparently the new “get tough on crime by inviting suspects to tea and scones at the DOJ cafeteria” plan. 

The Times article says: “after 10 months of stitching together evidence on the firm's demise, criminal investigators are concluding that chaos and porous risk controls at the firm, rather than fraud, allowed the money to disappear, according to people.”

I don't know if Corzine is responsible for stealing $1.6 billion in client funds, and apparently the regulators don't know where the money went, but somebody stole the money. Chaos and porous risk controls are not a legitimate defense for theft. Sorry. 

Then, we had the recent example of Standard Chartered. Some people think the New York state regulators in this case over-reached their authority and penalized a bank in a manner disproportionate to the crime it committed. Or maybe the crime was a decade long pattern of willful and blatant disregard for the law and then covering up their crimes; and maybe their crimes resulted in denying collection on a $2.6 billion dollar judgment against Iran, for the families and estates of  241 Marines killed in Beirut in 1983. One thing you can be sure of: the banks are treated to more privileges than Marines. Standard Chartered denied wrongdoing while they paid their $340 million dollar fine. I don't think the families of Marines are willing to accept that denial.  

There's a good chance the public will never know the truth. A settlement allows the banks to avoid airing their dirty laundry; the settlement is not as distracting as litigation; and a possible courtroom loss could destroy the entire operation. Regulators settle because they are over-worked; it's cheaper and easier; they are frequently outgunned and out-manned by the well financed attorneys representing the banks; and they don't risk an embarrassing not-guilty verdict. Ultimately, the process is corrosive to public trust. 

So, if you steal $1.6 billion you get an invitation to afternoon tea with investigators; if you finance terrorists who blow up Marines while they sleep at night in their barracks, you get to deny wrongdoing. The United States has 5% of the world's population and 25% of the world's incarcerated population. We put more people in jail than any other country. Communist China has a population four times greater than the US, but they lock up 700,0000 fewer people.  The Chinese, we've been told, are a cruel, authoritarian regime; what does that make us? Americans are locked up for fairly small crimes, from writing bad checks to using drugs, that would rarely produce prison sentences in other countries. And they are kept incarcerated far longer than prisoners in other nations. But the banksters get special privileges. 

The banking industry has  become so omnipotent, so all-consuming in our lives, so all-consuming of our money, so filthy rich that it buys and sells government officials, legislators, administrations, regulators, and presidents. So powerful that it has effectively captured the nation. How did an industry that accounted for between 5% to at most 7% of GDP in this country in the 1980s go to being responsible for more than 20% of GDP by 2007? That’s a lot of paper shuffling for some very lofty fees and fringe benefits. You've got to ask yourself if we're better off for the bankers increasing power.

The past couple of weeks have been some of the worst in recent memory for Bankster scandals. In addition to Standard Chartered Iranian money laundering settlement, and the MF Global dodge; we saw Goldman Sachs avoid prosecution on bundling subprime, selling it to clients and then betting against it – apparently this is a good business model. And don't forget UBS, which had to pay a $780 million dollar fine in 2009 for helping clients dodge taxes, well UBS was back in the news this week for the same thing. And don't forget the Morgan Stanley electricity rigging in New York, where they jacked up electricity prices by about $300 million and then paid a $4 million dollar fine. And don't forget the credit card robo-signing scandal, where debt collectors sign off on affidavits just betting that you won't respond. And don't forget the Libor rigging scandal. Everything you ever knew about interest rates was manipulated, and which resulted in seven more banks being subpoenaed this week. 

And still there has not been a single criminal charge filed by the federal government against any top executive of the elite financial institutions. 

Now, don't for one minute think law enforcement isn't cracking down on financial criminals. The Department of Justice created the Financial Fraud Enforcement Task Force, and wow, have they been busy. Here is just a partial list from Daily Beast of some of their “get tough” enforcement: 


The DOJ sent a property appraiser in Washington, D.C., to the slammer for 65 months for fraudulently inflated prices in a scheme to “flip” properties. The scheme was a small-time $1 million operation, a sharp contrast with the billions on Wall Street.

Federal officials went after 10 people in Las Vegas because they tried to “fraudulently gain control of condominium homeowners’ associations in the Las Vegas area so that the HOAs would direct business to a certain law firm and construction company.”

Five people in California were charged with bid-rigging foreclosure auctions. The individuals have been charged with violating the Sherman Act and could face up to 10 years in jail.

And there are about 6 or 7 more stories about the DoJ's crackdown on financial criminals.  Occasionally a rogue trader gets prosecuted; a Bernie Madoff or a Raj Rajaratnam for example. The cases they prosecute are slam dunks, super-simplified, and super-stupid cases of blatant insider trading or blatant pyramid schemes. 

The banks pay big money to have lawyers and accounting firms produced hundred of pages that say that something illegal is legal, to say loans are actually sales, to determine that toxic assets are solid cash reserves. Stealing, tax evasion, accounting fraud – it's all legal if you pay enough accountants and lawyers to say it's legal. We all say we want justice but you've got to have money to buy it.