the markets are boring you this summer, you just aren't paying
attention. August trading in this post-financial crisis landscape has
been anything but boring. For the past four years, the market has
offered tremendous gains and harrowing losses during the month of
August. The boring, flat market many of us have grown to expect just
were treated to big gains in August 2009 and August 2012. But in
August 2010 and 2011, the broad market coughed up about 5%. In 2010,
August ended up marking the final lows of a summer correction. In
2011, the eurozone crisis pulled stocks underwater by as much as 12%
during the month of August, only to claw their way back from the
brink of a new bear market. So much for the dog days of summer. This
time around, nothing should surprise you.
US trade deficit declined in June to its lowest level in more than
3-1/2 years as imports fell and exports touched a record high. The
Commerce Department says the trade gap fell 22.4 percent to $34.2
billion, the smallest since October 2009. The percentage decline was
the largest since February 2009.
shortfall on the trade balance was revised to $44.1 billion from the
previously reported $45.0 billion. Exports of goods and services
increased 2.2 percent to a record $191 billion. The gain in exports
was broad based, with food, industrial supplies, capital goods and
consumer goods rising. Motor vehicle exports, however, fell in June.
The increase in export growth may point toward slightly stronger
second half GDP growth for the economy.
mentioned yesterday that we were expecting some Federal Reserve
officials to give some speeches this week. Yesterday, Dallas Fed
President Richard Fisher called for an end to QE; no surprise because
it's well known that Fisher opposes ongoing QE. Today, Dennis
Lockhart, President of the Federal Reserve Bank of Atlanta spoke as
part of a panel discussion; and Charles Evans, President of the
Chicago Fed Bank spoke to reporters.
improvement in the labor market would be key: "If we see the
growth pick up in the second half and if we see a continuation of the
job gains that we - not (the) 162,000 number that we saw last month
but at a higher range, say 180-200,000 - I think with other
fundamentals improving we probably are in a position to remove ...
the extraordinary policy program over the medium term - that being
the asset purchase program." Lockhart also said that if the
economy deteriorates then the exit from QE is not a foregone
Fed President Charles Evans said much of the same: "We are quite
likely to reduce the flow of purchases rate starting later this year
- I couldn't tell you exactly which month that will be - and it's
likely to wind down over time in a couple or few stages."
Fed officials think the Fed will stick to a Zero Interest Rate Policy
for quite some time. Evans said he expects the economy to grow about
2.5 percent in the second half of this year, and more than 3 percent
next year. That rate of growth should generate about 175,000 to
200,000 jobs a month and will probably bring the unemployment rate
down to about 7.2-7.3 percent by the end of the year. So, the outlook
is rosy, the current conditions, not so much. The Fed doesn't always
nail economic forecasts.
told, Evans said, the Fed's third round of quantitative easing, or
QE3, will likely total at least $1.2 trillion since January 2013,
double the size of the Fed's prior round of purchases. So, we might
question whether we got our money's worth and also if the economic
forecasts are good enough. Even if the economy starts averaging
200,000 net new jobs per month, is that good enough, considering the
quality of jobs? Is 6.5% unemployment good enough? Remember, the Fed
hasn't seen much in the way of fiscal policy to improve the
regional Fed policymaker, Narayana Kocherlakota, president of the
Minneapolis Fed, has called for the Fed to spur the economy further
by lowering its threshold for considering a hike in rates to 5.5
percent unemployment, near the economy's long-term normal rate.
the markets were down today, even with good news on the trade deficit
because the market is focused on free money from the Fed and fearful
they will take away the punch bowl, or the Bernanke “put”, or
whatever you want to call it; the Fed has been pumping $85 billion a
month into the markets and they would hate to see it go. For the rest
of us, that money doesn't seem to filter down from Wall Street to
Main Street, but it is turning into the lifeblood of Wall Street, and
when it's gone Wall Street will likely respond poorly, and today was
just a small indication.
government filed two civil lawsuits against Bank of America for what
the Justice Department and securities regulators said was a fraud on
investors involving $850 million of residential mortgage-backed
Justice Department and the Securities and Exchange Commission filed
the parallel suits in US District Court in Charlotte.
securities date to about January 2008, putting them just at the
beginning of the global financial crisis.
of America responded to the lawsuits with a statement: "These
were prime mortgages sold to sophisticated investors who had ample
access to the underlying data, and we will demonstrate that.
of America had warned in a securities filing on Thursday about
possible new civil charges linked to a sale of one or two mortgage
two suits accuse Bank of America of making misleading statements and
failing to disclose important facts about the mortgages underlying a
securitization named BOAMS 2008-A.
misstatements and omissions concerned the quality and safety of the
mortgages collateralizing the BOAMS 2008-A securitization, how it
originated those mortgages and the likelihood that the 'prime' loans
would perform as expected," the Justice Department said in its
statement. A "material number" of mortgages in the pool
"failed to materially adhere to Bank of America's underwriting
of America has announced a series of settlements with investors and
the government, including an $8.5 billion settlement with investors
in mortgage-backed securities and a $1.6 billion deal with bond
insurer MBIA Inc.
week, a jury in New York City convicted
former Goldman Sachs trader Fabrice Tourre on
six civil counts of securities fraud, for selling a toxic
mortgage-backed bond to investors without disclosing that an
architect of the deal, hedge fund Paulson & Co., also bet on its
failure. This victory for the Securities and Exchange Commission
signifies a long-awaited measure of justice for the unbridled greed
and dirty dealing that sparked the financial crisis, but an
exceedingly small one. Tourre was a young, mid-level employee, listed
as a “vice president,” but so are hundreds of people at Goldman,
not a decision-maker in executive suites throughout Wall Street. The
conviction means he’ll pay a fine and probably get barred from the
securities industry, an industry he’s already left to pursue a
doctorate. This is hardly the level of accountability that
practically the entire country demanded to see, especially when you
consider that it represents the sum total of legitimate
crisis-related convictions, and a non-criminal one at that. The
SEC must stop chasing minnows while letting the whales of Wall Street
this, the Tourre case matters. It should lead Washington to rethink
the conventional wisdom that financial regulators and Justice
Department officials have spread about these cases: that they’re
impossible to prosecute. It’s not just critical for how we remember
the last crisis; it also shapes how we should think about the next
one, whenever it comes to pass.
you look at all the excuses for the total absence of prosecutions of
major bank executives for their roles in nearly crashing the global
economy, you find two major themes. First, the financial industry’s
conduct was perhaps unethical but not technically illegal, especially
since the peculiarities of securities law ensure that well-heeled
bank executives will find some loophole to exculpate themselves from
guilt. Second, juries will not be able to understand the hopelessly
complex intricacies of the law, and will simply punt before agreeing
beyond a reasonable doubt on the guilt of the bankers.
Tourre case proves these both wrong. To say the case discredits a
silly argument gives that argument too much weight. There were
numerous convictions of accounting fraud in the Enron and WorldCom
era, in cases that were at least as complex as the 2008 crisis.
Ultimately fraud is fraud. Juries are more sophisticated than people
give them credit for. They take their job seriously.
appears to be the result of the trial of Fabrice Tourre. The jury,
which has been interviewed
fully understood that Tourre was something of a scapegoat and not the
central decision-maker at the firm. They recognized that senior
executives at Goldman Sachs approved the deal, known as Abacus. And
they generally discounted the damning emails from Tourre, bragging
about selling the toxic bonds to “widows and orphans.”
they bore down into the details, asking simple questions about
whether Tourre’s lack of disclosure to investors about the
designed-to-fail quality of Abacus represented securities fraud. They
saw through the allegation that the industry generally did not
disclose the participation of hedge funds like Paulson in derivatives
deals, and focused on whether that constituted a material
misrepresentation. And Tourre’s participation in the scheme, not
his place on the totem pole at Goldman, was the determinative factor.
One juror summed it up this way: “They portrayed him as a cog, but
in the end a machine is made up of cogs and he was a willing part of
that.” While Toure faced civil charges with a lower burden of
proof, these core insights from the jury could have been employed
even in criminal financial fraud cases.