Monday, August 13, 2012 - The World Slows Down but Refuses to Admit or Deny Slowing

The World Slows Down but Refuses to Admit or Deny Slowing
- by Sinclair Noe

DOW – 38 = 13,169
SPX – 1 = 1404
NAS + 1 = 3022
10 YR YLD +.01 = 1.65%
OIL +.01 = 92.74
GOLD – 10.60 = 1610.90
SILV - .30 = 27.93
PLAT – 13.00 = 1391.00


The S&P 500 closed slightly negative, but the interesting part was the volume, or the lack thereof on the New York Stock Exchange. It was the lowest non-holiday-trading day volume in over a decade; only 380 million shares changed hands. You've got to wonder if the problems with Knight Capital last week have exposed a problem. Clearly something broke with Knight's algorithm software glitch. Could it be that the volume on the exchange has been artificially inflated? Yep. And what did we get for having a company like Knight Capital scalping with High Frequency trades? We all lost a little. 

The S&P 500 and Dow have risen every week for the past five weeks. The S&P 500 last wrapped up a five-week climb in mid-March. The Dow hasn't done so since last October. The Dow has fallen for 10 out of the past 11 Mondays, and the S&P 500 has finished down five of the last six.

Japan’s economy grew in the second quarter at a 1.4 percent annual rate, slower than expected. Last week, China released dismal figures on retail sales and exports in July. There was some speculation Beijing would roll out stimulus measures over the weekend. That did not happen.

Slower growth in Asia is problematic because Asia’s economic endurance has helped offset weakness in the US and Europe. Exports from China and Japan are declining as Europe’s economic problems hurt consumer confidence there. The whole world is slowing down.

Japan’s exporters are under duress as the debt crisis in Europe has cut into sales. There were some expectations about the possibility of action from Japan’s central bank; although I don't know what the Bank of Japan can do, except continuing to push on a string. And right now it looks like central banks globally have been hesitant to do anything. The general opinion is to wait a few weeks and see if the whole mess can just wait until September. 

A senior member of Chancellor Angela Merkel’s party issued a stark warning to Greece today, saying Germany would not hesitate to veto further aid to the country if there were any signs it was not meeting the conditions of its bailout…”Even if the glass is half full, that won’t be sufficient for a new aid package. Germany cannot and will not agree to that.” It is easy to be tough minded when things are going well, and the core of the euro-zone has been tough minded on the periphery, but now it appears the core may be feeling economic restrictions; not as bad as Greece.  Gross domestic product slid 6.2 percent in the second quarter from a year earlier. That follows a 6.5 percent year-over-year contraction in the first quarter.  The second quarter was difficult, with two parliamentary elections, tough austerity measures and a flight of deposits from Greek banks..  The Greek economy has shrunk almost 18 percent since the April-to-June quarter of 2008, a decline that suggests economic depression. So far, there appears to be little reason for optimism, with the unemployment rate in May reaching a record 23.1 percent, up from 22.6 percent in April. The jobless rate among youth has reached almost 55 percent.

Now the strain is starting to tell on the core countries, too. On Tuesday, estimates of second-quarter growth for the Euro-zone are expected to show a fall of 0.2 percent for the euro zone as whole, a 0.1 percent dip for France and just 0.2 percent growth for Germany. Germany's factory orders fell by an alarming 1.7 percent between May and June, much worse than the 0.8 percent forecast. If the euro-zone's biggest and healthiest economy is faltering, then who is left to do the bailing?

The recent emergence of an axis between Spain, Italy and France at the last euro zone leaders' summit shows that the political fault lines between core and periphery are shifting too. The relationship between German Chancellor Angela Merkel and her French opposite number, Francois Hollande, does not appear to be as close as her relationship with his predecessor Sarkozy.


There has been a lot of focus on the  LIBOR rigging scandal, but no one seems to be asking the question: why would banks want to contribute their LIBOR numbers at all? And what happens if they stop? If you run a bank you have to pay your treasurer to make up a bunch of numbers every day and send them out to be scrutinized. The media, the regulators, and clients will all read your contributions and compare them to other banks. Your numbers will inevitably be considerably higher or lower than the average and you will be accused of wrongdoing. 

Of course your treasurer can't be bothered with making up numbers daily, so the job gets sloughed off on junior accountants. And you can only hope those junior employees don't have too many persuasive friends on the trading floor trading basis swaps.  And the banks do this for free; a few of the more clever bankers figured out they could make a few proprietary trades on the side, but mainly it was not much upside opportunity. It is therefore likely that many banks will simply pull out of this exciting venture going forward. So will Libor die? What will take its place? Just asking. 

The Federal Reserve bank of St. Louis says the shadow  banking sector was close to $20 trillion at its peak and shrank to about $15 trillion last year, making it at least as big as, if not bigger than, the traditional banking system. The still scary part is that the shadow banks serve as  financial intermediaries that conduct functions of banking "without access to central bank liquidity or public sector credit guarantees." No guarantees means there could be problems; if so, the problems would be big. Remember what happened in 2007? Problems with money markets...

Peregrine Financial Group CEO Russell Wasendorf Sr., who attempted suicide outside his Cedar Rapids, Iowa office in July, has been indicted on charges of making false statements to regulators.

The Federal Trade Commission finished a settlement with Facebook on Friday over allegations that the company had violated its privacy policy, and in the process said it would re-examine its own practice of allowing companies to settle charges of wrongdoing while denying that they had done anything wrong.

The FTC’s turnabout came in response to dissent from the Facebook settlement by one commissioner, J. Thomas Rosch, who said that allowing the company to deny charges it was agreeing to settle undermined the commission’s authority.

In November, the FTC said that Facebook had deceived consumers by telling them that their personal information would be kept private, while “repeatedly allowing it to be shared and made public.”

The commission voted 3-1, with one abstention, to impose a 20-year consent order requiring Facebook to protect its users’ privacy. The company agreed to give consumers clear and prominent notice and to obtain their express consent before revealing information beyond their previously stated privacy settings, to maintain a comprehensive program to safeguard private information, and to obtain an independent privacy audit every two years. Facebook said in a statement on Friday, “We are pleased that the settlement, which was announced last November, has received final approval.” The company did not repeat its assertion, made in November, that it “expressly denies the allegations set forth in the complaint.”

The FTC is not the only federal agency that allows a company to deny facts that it seems to be conceding. In July, the Justice Department settled a case with the pharmaceutical maker GlaxoSmithKline in which the company agreed to pay $2 billion to settle civil charges that it defrauded the government with drug sales. Despite the payment, Glaxo expressly denied that it had engaged in any wrongful conduct. That seems to invite denials of liability in every case in the future.

Securities and Exchange Commission’s rules ban a company that settles a case from denying that it committed the acts in question. The SEC  also states that “a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations.” That rule would disallow the FTC’s language that a settlement “does not constitute an admission” of guilt.

The SEC’s policy, however, has itself been a subject of dispute. A federal judge in Manhattan refused to approve an SEC settlement with Citigroup last year, saying that the agency’s policy of allowing a company to neither admit nor deny allegations gave him no basis on which to judge whether the settlement was in the public interest.

The case, heard by Judge Jed Rakoff of Federal District Court in Manhattan, is now being considered by a federal appeals court. So, we've reached a point where major corporations can't just pay a fine and deny wrongdoing; we've advanced to the point where they may have to pay a fine and not admit wrongdoing. These may seem like subtle distinctions but they are not. 



Credit card debt collection may achieve the dubious distinction of making mortgage servicers look good. The New York Times reports that credit card debt collection was a heavy user of robosigned affidavits, and credit card companies frequently file erroneous lawsuits, sometimes saying a customer owes money when they’ve paid off the balance, and then if they can establish there is a balance, there are problems with the accuracy of the balance. Unlike foreclosures, where even after the revelation of widespread and varied mortgage abuses, most judges are pro-bank, in the credit card realm, the conduct of lenders is so bad that experienced judges are skeptical of them. From the article:

As they work through a glut of bad loans, companies like American Express, Citigroup and Discover Financial are going to court to recoup their money. But many of the lawsuits rely on erroneous documents, incomplete records and generic testimony from witnesses, according to judges who oversee the cases.

Lenders, the judges said, are churning out lawsuits without regard for accuracy, and improperly collecting debts from consumers. The concerns echo a recent abuse in the foreclosure system, a practice known as robo-signing in which banks produced similar documents for different homeowners and did not review them.

“I would say that roughly 90 percent of the credit card lawsuits are flawed and can’t prove the person owes the debt,” said Noach Dear, a state civil court judge in Brooklyn, who said he presides over as many as 100 such cases a day….

The problem, according to judges, is that credit card companies are not always following the proper legal procedures, even when they have the right to collect money. Certain cases hinge on mass-produced documents because the lenders do not provide proof of the outstanding debts, like the original contract or payment history.

At times, lawsuits include falsified credit card statements, produced years after borrowers supposedly fell behind on their bills.

But the big reason that the credit card companies can ride roughshod over the law is that so few consumers contest these cases. The article reports that 95% go uncontested, meaning the lender will win a default judgment and can then garnish wages or bank account balances.

And if you think it’s bad with the credit card companies, it’s even worse with the bottom feeders. There ares statutes of limitations on unpaid debts; for most states, its about 4 or 5 years. Apparently a hedge fund is backing a company that buys bad debts from credit card companies, debt they’ve already written off, shortly before the statue of limitations is about to expire, for pennies on the dollar. They then file suit. They don’t even plan to spend any money fighting, they're just intent to win default judgments. So if you hire a lawyer and merely file an answer, you win. But a remarkably high percentage of people fail to do that. And this is the business model that the hedge fund has determined is a good business model.