Monday, September 30, 2013

Monday, September 30, 2013 - Politically Dysfunctional Insanity

Politically Dysfunctional Insanity
by Sinclair Noe

DOW – 128 = 15,129
SPX – 10 = 1681
NAS – 10 = 3771
10 YR YLD - .04 = 2.61%
OIL - .56 = 102.31
GOLD – 8.30 = 1328.90
SILV - .07 = 21.81

We'll get to the shutdown and all that fun politically dysfunctional insanity in just a moment, but first we need to wrap up the third quarter. The Dow Industrials are up about 260 points for the third quarter, and the S&P500 is up 80 points. Year to date the Dow has gained about 2000 points and the S&P has gained about 260. Since the start of the year, the yield on the 10 year Treasury note has climbed from around 1.75% to 2.51% at the end of the second quarter (briefly touching 3%). Oil prices dropped from around $110 in just about a week's worth of trading, but prices are up about $10 dollars since the start of the year, and down about $1 for 3Q.

If you're wondering how the Sell in May idea has worked out, well the Dow is down about 130 points from the May sell signal and the S&P is down 35 points. So, Sell in May is looking good and could look a whole lot better if the government shuts down in a little less than 5 hours. Tomorrow, the fourth quarter begins. A potential federal government shutdown looms at midnight. So, the question is whether underperforming Wall Street traders will push prices higher in the face of government stupidity; and the answer is probably not.

Of course Congress could finally realize how stupid they are and they could come to some sort of resolution to keep the government open. An eleventh-hour deal looks unlikely at this point. But if you recall, the fiscal cliff bargain that started 2013 actually came in after the mandated deadline. It wouldn't surprise me to see these clowns come in with a late save again.

The similarities between the fiscal cliff market reaction and the current shutdown threat are striking. The broad market fell 6 out of 7 days immediately leading up to the fiscal cliff scare. This time around, the market is down 7 out of 8 sessions heading into the shutdown.

On March 6, 2009 the market officially hit bottom with the S&P at 666 (yes, that is an ominous place to start something good). From there we have enjoyed a healthy and lengthy bull market; you can argue it is a cyclical bull, but it has been a pretty neat rally.

Unfortunately all good things must come to an end. So lets consider what will bring about the end to this bull rally. Traditionally, there are the 2 main reasons that end a bull market and bring about the next bear: a recession is on the way, or because stocks very overvalued. Typically, bulls die because of a looming recession. However, you may remember 2000, where valuation became extreme and the exuberance was eventually deflated with the popping of the tech bubble.

So, here we are, stocks down 7 out of the past 8 sessions. The media is riveted with the crisis; the shutdown clocks are ticking; traders are nervous about the shutdown because it can do some very real damage to the economy; make no mistake and do not underestimate the potential harm and the possibility that Congress could push the economy into recession. Or the politicians could come up with a Hail Mary.

Beyond the immediate, there are underlying problems. Remember the Fed's recent non-taper, alongside lowered growth forecasts for 2014 would actually suggest things are not as rosy as Wall Street would have you believe. Yields continued to fall, for the basic reason that you can not normalize yields unless you also normalize growth and inflation. The forgotten idea is that QE3 has not resulted in an increase in inflation expectations. Stocks fell when taper talk took hold from mid-May to June, and are now dropping after the Fed said no taper at all. The economic data simply does not support an easing of stimulus. The third round of QE has lost its reflationary punch, and if $85 billion a month is not enough to kick-start growth, then maybe we should reconsider valuations. Now toss in a government shutdown and it's like tossing a match on gasoline.

The US will be downgraded to "selective default" (SD) if the debt ceiling isn't raised by mid-October and the government fails to service a debt, says S&P, the ratings agency, but there will be no change to the AA+ credit rating as long as the impasse is short-lived. "This sort of political brinkmanship is the dominant reason the rating is no longer AAA."

If this all sounds familiar, it is.

Come mid-October, the United States will have only $30 billion of cash on hand. On any given day, its net payments can reach as high as $60 billion. That means that unless Congress raises the debt ceiling, allowing the Treasury to issue new debt, the United States may find itself unable to make all of its payments — stiffing government contractors, or state and local governments, or even its bondholders.
Economists widely agree that such an unprecedented event would have profound effects for the markets, likely precipitating a stock-market sell-off and setting off a round of global financial turbulence. But it has always been a little unclear just how it may play out. The Treasury might announce it would be forced to delay some payments, promising to do what it could to make sure bondholders were made whole. But then what?
The team at RBC Capital Markets has put together a terrifying play-by-play for the Alphaville blog of The Financial Times. It shows how a debt-ceiling breach would translate quickly into a credit crunch and financial crisis with some disconcerting similarities to 2008. Get ready for some scary reading:
Let us be perfectly clear: crossing the debt ceiling would be catastrophic. The Treasury’s systems do not clearly mark what scheduled payments are for what reasons, so it is impractical to try to prioritize payments. And clearing systems like Fedwire do not allow defaulted securities to flow, so the system would seize. In order for the clearing systems to work, the Treasury would need to notify the market of a default almost a day before the default happened (to give everyone time to modify payments), and that is not going to happen because the Treasury will not want to declare default while Congress still has time to pass a bill. Also the Fed does not take defaulted securities as collateral at the discount window, even if those securities are still trading at par.
It continues:
While we think the probability of the debt ceiling causing a technical default in the Treasury market is near zero, nonetheless, there are likely to be market disruptions. The main issue is that the markets are not set up to trade or finance defaulted Treasuries. While many RP documents say that defaulted securities cannot be delivered as collateral, delivery systems are not set up to easily sort out which Treasuries have defaulted and which have not (there are no cross-defaults on Treasuries), so the RP markets can seize up as the debt ceiling drop-dead date approaches.
That’s pretty technical, but it boils down to this: A debt-ceiling crisis could throw sand — a whole lot of sand — into the gears of the financial system, making it impossible for market participants to tell “good” collateral from “bad” collateral. As my colleague Binyamin Appelbaum points out, that’s essentially the definition of a modern financial crisis.

What’s interesting — and disconcerting — to think about is how all the new tools the Treasury and Fed developed during and after the 2008 financial crisis will work in the event of a new crisis. The Treasury would be the source of the turbulence it would desperately be trying to stop, after all.

So, here's where we stand at last look, (you just need to use your imagination to see the Countdown clock ticking away in the lower left hand corner). House Republican leaders pushed forward a new plan to tie further government spending to a one-year delay in a requirement that individuals buy health insurance, after the Senate took less than 25 minutes to convene and dispose of a weekend budget proposal by the House Republicans.

The Republicans were planning a vote later Monday on the new plan, which also includes a denial of government subsidies to lawmakers and their staff members buying health insurance.

President Obama spoke in the White House briefing room on Monday evening, and castigated House Republicans for failing to perform one of the most basic functions by not providing money for the government. He said a shutdown would harm the economic recovery.

In their latest move, House Republicans attached language to a government funding bill that would delay the mandate that individuals obtain health insurance and would force members of Congress, their staffs and White House staff members to buy their health insurance on the new exchanges without any government subsidies.

That proposal makes it more likely that a partial shutdown of the government will begin just after midnight, barring a last-minute retreat by the House.

I wanted to take a few moments to go back over a story from last week. You may recall that last week, Jamie Dimon met with Attorney General Eric Holder to discuss a possible $11 billion dollar fine against JPMorgan for mortgage backed securities violations. We know that Dimon was looking for a smaller dollar figure and comprehensive liability coverage, but beyond that we don't know much about their conversation. The bigger question is why there was a conversation at all. Why did Eric Holder personally meet with Jamie Dimon. Do you think any AG would have met with Michael Milken when he was being investigated? Why did Holder meet with Dimon but not with Bernie Madoff?

What we have seen is how regulators and law enforcement bow down to their masters at the banks. You’ll witness the occasional stern word in public from the Administration or the regulatory minions to maintain the appearance that they operate independently of their financial lords and masters. But Holder has been so absent from any meaningful action that it’s surprising to see him pretend to play a hands-on role. His main job seemed to be acting as propagandist for enforcement theater.

Here's a recap from the Washington Post:
The sage of Wall Street journeyed to Washington.., but Jamie Dimon’s visit was unlike any the JPMorgan Chase chief has made before.
Dimon sought a meeting with Attorney General Eric H. Holder Jr. in an urgent bid to dispose of multiple government investigations into the bank’s conduct leading up to the financial crisis — and avoid criminal charges. The deal that Dimon discussed with Holder would involve paying the government at least $11 billion, the biggest settlement a single company has ever undertaken, according to several people familiar with the negotiations…
For Holder, meanwhile, a landmark settlement with JPMorgan could help quiet criticism that the Justice Department has failed to hold Wall Street accountable for sparking the housing market’s crash and the ensuing recession. Holder was criticized by lawmakers and consumer advocates this year for saying that some banks had become too big to prosecute.”

So, WaPo considers Dimon a “Sage of Wall Street”? The financial media has been falling over themselves to kiss Dimon's ring, perhaps forgetting that the results Dimon delivered are now being diminished by close to $18 billion in legal fees, plus maybe $11 billion in new fines. Sage” connotes wisdom above all, and Dimon’s conduct during and after the Whale affair was anything but. Still, on CNBC, the conclusion was that Jamie Dimon was secure in his job because “the stock’s touching a ten-year high. It’s a cash-generating machine.”. Or as Maria Bartiromo asked: “How could you criticize that?” Which is kind of like saying a restaurant poisoned their diners, but the veal parmigiana was delicious. 

Remember, the CFTC has not settled its Whale charges, and it might unearth some further violations or facts that make JP Morgan top brass look even worse. The DoJ (through its Southern District of New York office) has charged two JP Morgan traders. It isn’t clear whether it will succeed in getting either one extradited, but if it did, you can be sure prosecutors would be seeing if they could get them to cop a plea bargain to implicate more senior management. And at some point, some regulator might actually wake up, smell the coffee and see the clear and obvious violation of Sarbanes Oxley. That would be a slam dunk prosecution unless Jamie can prove he was out of town when the London Whale imploded, the telegraph lines were down, a blizzard made communication impossible and frozen bison blocked the railroad tracks; unless Jamie can prove that, there is no way he could Not have known what was happpening. (Sarbanes Oxley explicitly waives liability under those blizzard conditions.)

JPM’s rap sheet is so long and dirty that the gall of such in-your-face cronyism is simply breathtaking. Or maybe AG Holder is establishing new policy. Americans pride ourselves in insuring that everyone no matter their place in this society can and should expect equal justice. After all the Supreme Court building is emblazoned with “Equal Justice for All”. So Eric will you and your department, in the pursuit of equal justice, now offer all defendants the opportunity to visit your offices and discuss their case directly with you ?

Last week, for the first time since the financial crisis, the government faced off in court against a major bank over lending practices during the mortgage mania. Lawyers for the Justice Department contend that Countrywide Financial, a unit of Bank of America, misrepresented the quality of mortgages it sold to Fannie Mae and Freddie Mac, the taxpayer-owned mortgage finance giants, starting in 2007. And this may not be the only case to go to trial, there are a few others in the wings where the judge got tired of the super-lenient, no admission of wrongdoing deals being offered to the banksters. 

Friday, September 27, 2013

Friday, September 27, 2013 - Swords to Plowshares

Swords to Plowshares
by Sinclair Noe

DOW – 70 = 15,258
SPX – 6 = 1691
NAS – 5 = 3781
10 YR YLD - .02 = 2.62%
OIL - .16 = 102.87
GOLD + 12.40 = 1337.20
SILV + .05 = 21.88

The war hasn't started,... yet.

And it looks like it won't start any time soon; I refer, of course to US military intervention in Syria; the Syrian Civil War is ongoing, but the US didn't jump into that quagmire. A funny thing happened in New York last night, the five permanent members of the United Nations Security Council have agreed on a resolution that will require Syria to give up its chemical weapons; yes, that means Russia and China signed off on the deal, but there will be no automatic penalties if the Syrians fail to comply. If Syria fails to comply, there would need to be further UN agreement on what measures to impose for noncompliance. Still, it is a remarkable turn of events considering that a few short weeks ago we had destroyers in the Mediterranean and it looked like bombs would fly at the drop of a hat.

The diplomatic breakthrough on Syria came as Iran’s foreign minister, Mohammad Zarif, said progress had been made toward a resolution of the nuclear dispute between his country and the West, suggesting it could happen in a year. Zarif met face to face with Secretary of State John Kerry in one of the highest-level discussions between the two countries in more than 30 years. Then, this morning President Obama revealed he had talked by phone with President Hassan Rouhani of Iran, the first direct contact between the leaders of Iran and the United States since 1979. Obama said they discussed Iran’s nuclear program and said he was persuaded there was a basis for an agreement.

Mr. Obama added: “A path to a meaningful agreement will be difficult. And at this point both sides have significant concerns that will have to be overcome. But I believe we’ve got a responsibility to pursue diplomacy and that we have a unique opportunity to make progress with the new leadership in Tehran.”

So, the war hasn't started, and that's good. War is hell, and it's expensive. War, the military industrial complex, and the national security state that accompanies it can cost and arm and a leg, literally. And for many years, that is where American taxpayers' dollars have gone. Trillions of dollars. The Iraq war has cost somewhere north of $3 trillion, depending on the source for the numbers. And just to have the Tomahawk missile program sitting idle on the sidelines, waiting for potential deployment – that costs about $36,000 per hour. About $600 billion a year gets pumped into the Department of Defense, and that doesn't include the civilian intelligence community or the Department of Homeland Security. And we've recently learned there is more money being pumped to the civilian contractors than we previously imagined.

Budget cuts at the Pentagon were long considered an impossibility and a formula in Congress for political suicide. Now, the austerity movement’s first major initiative in Washington, known as sequestration, those mandated, take-no-prisoners, across-the-board cuts in federal spending instituted by Congress, have in fact accomplished what nothing else could: the first downsizing of our defense spending in this century. Sequestration cut about $40 billion from the Pentagon's funding this year. It's a start.

If we were smart, we should be able to get some credits for not starting wars, because that would have pushed military expenditures into the stratosphere. For example, no military intervention in Syria should result in at least $80 billion extra that could be spent to hire teachers or build bridges or public transit or to help veterans or green energy; whatever.

There should be a process for converting from a war economy to a civilian peace-time economy. Consider the Norfolk Naval Shipyard in Portsmouth, Virginia, a vast facility that repairs and rebuilds submarines. It spans 800 acres, contains 30 miles of paved roads and four miles of waterfront, employs 6,750 civilian workers, and has its own police and fire departments. Examining the current job categories at the shipyard reveals a skills base ready to be tapped to develop and produce green-energy technology. From electrical engineers and chemists to machinists, metal workers, and crane operators, there’s plenty of overlap between existing man- and womanpower in military industry and what’s needed for the robust growth of this country’s green energy sector.

For now, though, the shipyard is still doing submarines. And it will keep doing them until Congress makes new and different plans for this country. That's just one example; there are plenty more all around the country. Taxpayers have invested billions of dollars over decades in developing inventive technology, building infrastructure, and training skilled workers to fulfill military contracts for the war economy. It’s time for the American public to start seeing all this harnessed to new purposes.
Right now lawmakers are loath to cut funding if it means erasing military jobs in their districts, and the military-industrial complex has been particularly clever in the way it has spread its projects across every state and so many localities. Converting military contracts into green energy contracts would make redirecting wasteful military spending more politically feasible, and the federal government already operates an array of programs, including the Pentagon's own Office of Economic Adjustment, that could be expanded to help businesses and communities make the transition.

Moving public dollars into this country’s renewable energy sector could begin to lay the groundwork for a vibrant economy in the second and third decades of this century, while creating good jobs in a growth sector, working toward energy security, and helping this country reduce its reliance on fossil fuels. Like the construction of our interstate highway system in the 1950s, it’s an investment that would pay dividends for decades to come.

Maybe there is a better use of our time, energy, and money than to launch the next war.
The Intergovernmental Panel on Climate Change (IPCC), released the first chapter of its fifth assessment on global warming this morning, and the unequivocal message is that human beings are the “dominant cause of observed warming” that’s been seen since the mid-20th century and we must take action to cut greenhouse gas emissions. This is not news; while the certainty around the scientific case for man-made climate change has tightened somewhat, much of the new report reiterates the conclusions reached in the last IPCC assessment,which was released in 2007. 
The new report says that even if the world begins to moderate greenhouse gas emissions, warming is likely to cross the critical threshold of 2C by the end of this century. That would have serious consequences, including sea level rises, heatwaves and changes to rainfall meaning dry regions get less and already wet areas receive more. The IPCC warned that the world cannot afford to keep emitting carbon dioxide as it has been doing in recent years. To avoid dangerous levels of climate change, beyond 2C, the world can only emit a total of between 800 and 880 gigatonnes of carbon. Of this, about 530 gigatonnes had already been emitted by 2011. We're two-thirds of the way there. That has a clear implication for our fossil fuel consumption, meaning that humans cannot burn all of the coal, oil and gas reserves that countries and companies possess. In other words, we are fast approaching a tipping point, a point of no return.
Each of the IPCC’s last five big reports found that climate science has gotten increasingly certain that the planet is warming, and humans are the main cause. Scientists have a 95-100 percent certainty (“extremely likely”) that humans are causing temperatures to rise. Directly from the report: “It is extremely likely that more than half of the observed increase in global average surface temperature from 1951 to 2010 was caused by the anthropogenic increase in greenhouse gas concentrations and other anthropogenic forcings together.” The report in 2001 was 66 percent certain, and the 2007 report was 90 percent certain. Scientific conclusions that cigarettes are deadly and that the universe is about 13.8 billion years old have similar levels of certainty.
The science finds that the atmosphere and ocean have warmed, the amount of snow and ice has diminished, the global mean sea level has risen and that concentrations of greenhouse gases have increased. The central estimate is that warming is likely to exceed 2C, the threshold beyond which scientists think global warming will start to wreak serious changes to the planet. That threshold is likely to be reached even if we begin to cut global greenhouse gas emissions, which so far has not happened.
The IPCC assessments are important because they form the scientific basis of UN negotiations on a new climate deal. Governments are supposed to finish that agreement in 2015, but it's unclear whether they will commit to the emissions cuts that scientists say will be necessary to keep the temperature below a limit at which the worst effects of climate change can be avoided. And the worst effects of climate change are scary; livelihoods across the planet will be affected, the sea levels will rise, major changes in the sources and availability of drinking water, massive displacements of hundreds of billions of people, the acidification of the oceans, raging forest fires, famine, starvation, and more.

The science grows clearer, the case grows more compelling, and the costs of inaction grow beyond anything that anyone with conscience or commonsense should be willing to even contemplate. 

Thursday, September 26, 2013

Thursday, September 26, 2013 - The Quotas Must Be Filled

The Quotas Must Be Filled
by Sinclair Noe

DOW + 55 = 15,328
SPX + 6 = 1698
NAS + 26 = 3787
10 YR YLD + .03 = 2.64%
OIL + .20 = 102.86
GOLD – 9.30 = 1324.80
SILV - .07 = 21.83

A couple of economic reports this morning with conflicting signals. The National Association of Realtors said its Pending Homes Sales Index, based on contracts signed last month, decreased 1.6 percent. At the same time, labor market data was more positive. Initial claims for state unemployment benefits dropped 5,000 last week to a seasonally adjusted 305,000.

And a little bit of research from the Atlanta Fed's macroblog that you probably didn't see; they report the pace of research and development (R&D) spending has slowed. The National Science Foundation defines R&D spending as “creative work undertaken on a systematic basis in order to increase the stock of knowledge” and application of this knowledge toward new applications.
R&D spending is often cited as an important source of productivity growth within a firm, especially in terms of product innovation. But R&D is also an inherently risky endeavor, since the outcome is quite uncertain. On top of that, the federal funding of R&D activity remains under significant budget pressure.

In the Countdown to the Shutdown, the Senate is expected to pass a government spending bill and send it back to the House of Representatives on Saturday, minus the defunding of Obamacare; the bill would be a so-called “clean” spending bill, dealing with spending and nothing else. House Speaker John Boehner says he doesn't like that and the House will try to tack on a measure to delay Obamacare for one year; they will also attach new spending cuts and other initiatives to a debt limit bill, something that Obama has said he would not tolerate.

If they can't figure this out, there could be a shutdown when we wake up on Tuesday morning. And despite near-universal acknowledgment that a shutdown is bad, it could happen. Investors have gone through such Washington brinkmanship before in 2011 and at the end of last year. There is a level of fatigue that has settled over the markets with regard to shutdowns and fiscal cliffs and political dysfunction. Last-minute deals emerged each time to kick the can down the road, and many investors believe this may play out again. Meanwhile, Treasuries have rallied from the expectation of taper to the fatigue of debt ceilings, and the only thing that seems to make sense is that the Fed wouldn't dare taper while Washington is in distress.

A new Bloomberg poll reveals most Americans say the country is on the wrong track: “Americans also are pessimistic about the course of the country, with 68 percent saying it’s headed in the wrong direction, the most in two years, according to the poll of 1,000 adults conducted Sept. 20-23.”

Note this is not a general malaise: “Americans’ negative feelings about Washington contrast with more optimistic views about their own prospects. Thirty-five percent of respondents expect their financial security to improve during the next year, up from 25 percent in December 2012.”

But for now, the circus is back in DC, and it's entertaining even if the act is stale. At least it would be fun if the whole thing didn't cost so much. So what has austerity cost us in the United States? The full price is hard to calculate, but the Congressional Budget Office figures that sequestration alone has cut GDP growth by about 0.8 percentage points. Since sequestration accounts for less than half of total belt-tightening over the past couple of years, a rough guess suggests that our austerity binge has cut economic growth by something like 2 percentage points—about half the total growth we might normally expect following a recession. Ironically, this means that we have indeed suffered the halving of economic growth that Reinhart and Rogoff estimated we’d get from running up the national debt above 90 percent. But we got it from not running up the debt. Go figure.

Jamie Dimon, the CEO of JPMorgan met with US Attorney General Eric Holder today, looking to cut a deal to end investigations into the bank's mortgage securities deals leading to the 2008 crisis. The talks might result in an $11 billion settlement; $7 billion cash and $4 billion in various forms of borrower relief; which is another way of saying it's really just a $7 billion dollar settlement, with some extra work for the accounting department on the side. Remember last year's multi-state, multi-bank $25 billion mortgage settlement? A new report shows the vast majority of the aid to borrowers came in the form of short sales and forgiveness of second mortgages. Just 20% of the aid doled out under the national settlement went to forgiveness of first-mortgage principal.

JPMorgan has been trying to negotiate a smaller settlement of perhaps $3 billion, but that lowball offer was rejected. A settlement of the government mortgage cases in the $11 billion range would likely include claims from the regulator of Fannie Mae and Freddie Mac, which has sought some $6 billion from the bank over risky mortgage securities sold to the government-sponsored entities. There are also talks about which liabilities would be covered in the announced amount of a deal. There are still state investigations and various other probes. The Justice Department has a minimum of seven different probes into JPM and they're reportedly trying to settle as many as possible in rapid fashion.

JPMorgan's litigation costs totaled $17.3 billion over the last three calendar years, according to the company's annual report. Add another $11 billion and soon you're talking real money; and yet for all that, remarkably, unbelievably, no senior executives have criminally charged. It's a whole lot of money, completely detached from personal responsibility. JPM has a ton of money. Earnings estimates are pegged around $22 billion for 2013 and the company has a market cap of about $200 billion. Is $11 billion enough of a payoff to get the regulators to leave Jamie Dimon alone?

This is just the cost of doing business for these mega banks. There's the rub. Paying off regulators and settling criminal charges is only supposed to be the "cost of doing business" for criminals. When the FBI goes after the Mafia the stated goal was putting them out of business. There is no specific goal when it comes to cracking down on Wall Street. Only a portion of the settlements collected go to the actual victims. For the most part the money is used to fund more investigations. As long as JPM's income exceeds its legal fees they have no economic incentive to stop pushing the law at every opportunity. 

Most of JPMorgan's penalties did not include an admission of wrongdoing, but last week's $920 million dollar settlement of the London Whale trades did include an admission of wrongdoing. JPMorgan had to confess to Sarbanes Oxley violations.

The reason that this is a big deal is Sarbanes Oxley was designed expressly to get past the “I’m the CEO and I have no idea what happened” defense. Sarbanes Oxley requires corporate executives, which generally is at least the CEO and the CFO, to certify the adequacy of internal controls. And for a big bank, that includes risk controls. You can’t pretend to have adequate controls when, as the SEC describes, management is shocked to learn that their trading desk in London is involved in wildly reckless trades. But it isn’t just banks that have to now take Sarbanes Oxley seriously, although they are the most obvious targets. Everyone who signs Sarbox certifications is now at risk, as they were supposed to be all along. Jamie Dimon has met all the conditions for a criminal prosecution under Sarbanes Oxley, and the only reason why he hasn't been indicted is he heads a Too Big To Fail bank.

And so there was a meeting today between AG Holder and Dimon, arguing about price.

Meanwhile, on an only slightly related note, a new report from In the Public interest reveals that private prison companies are striking deals with states that contain clauses guaranteeing high prison occupancy rates. The report, "Criminal: How Lockup Quotas and 'Low-Crime Taxes' Guarantee Profits for Private Prison Corporations," documents the contracts exchanged between private prison companies and state and local governments that either guarantee prison occupancy rates (essentially creating inmate lockup quotas) or force taxpayers to pay for empty beds if the prison population decreases due to lower crime rates or other factors (essentially creating low-crime taxes).

Some of these contracts require 90 to 100 percent prison occupancy. In a letter to 48 state governors in 2012, the largest for-profit private prison company in the US, Corrections Corporation of America (CCA), offered to buy up and operate public state prisons. In exchange, states would have to sign a 20-year contract guaranteeing a 90 percent occupancy rate throughout the term.

While no state accepted CCA’s offer, a number of private prison companies have been inserting similar occupancy guarantee provisions into prison privatization contracts and requiring states to maintain high occupancy rates within their privately owned prisons. Three privately run prisons in Arizona have contracts that require 100 percent inmate occupancy, so the state is obligated to keep its prisons filled to capacity. Otherwise it has to pay the private company for any unused beds. The report notes that contract clauses like this incentivize criminalization, and do nothing to promote rehabilitation, crime reduction or community building.

Wednesday, September 25, 2013

Wednesday, September 25, 2013 - Imagine

by Sinclair Noe

DOW – 61 = 15,273
SPX – 4 = 1692
NAS – 7 = 3761
10 YR YLD - .04 = 2.61%
OIL - .83 = 102.30
GOLD + 10.10 = 1334.10
SILV + .07 = 21,90

The stock markets have gone through a bad patch; five consecutive declines have knocked 400 points off the Dow Industrials; no surprise. According to the Stock Traders Almanac, the week after September options expiration (this week) has consistently been one of the worst of the year. Since 1988, weekly declines average from –0.93% for NASDAQ to –1.49% for Russell 2000 and S&P 500 has only posted gains five times in 25 years. Meanwhile, bonds have enjoyed a nice little rally since the Fed announced “no taper”. We can understand how quantitative easing benefits Treasuries, but the threat of a government shutdown or default benefiting Treasuries? Go figure. I read today that a chief investment strategist at a trading house that will go unnamed is predicting that the S&P 500 may go to 1,900 now that the Federal Reserve has decided to not taper its asset purchasing program. He is correct. It might go to 1,900. Then again, it might not.  It might go to 600. Then again, it might not.

Why should market players be nervous? No worries! We finally got bipartisan cooperation in Congress; after weeks of wrangling and posturing, Senate Democrats and Republicans came together in a near-unanimous vote to shutdown Senator Ted Cruz. The vote shuts down all non-essential function of Senator Cruz; so it is, for all practical purposes, a complete shutdown.

The government shutdown is still in limbo, so we can almost turn our attention to the next bit of dysfunctional fiscal policy which involves running out of money, also known as the debt ceiling. Treasury Secreatary Jack Lew sent a letter to Congress explaining that the government would exhaust its borrowing capacity no later than October 17. The government has been scraping up against the debt ceiling since May, but it has avoided defaulting on any of its obligations by employing emergency measures to manage its cash, such as suspending investments in pension funds for federal workers. In his letter, Lew said the updated estimate reflected fresh information on quarterly tax receipts and the activities of certain large government trust funds.

A new poll questioned Americans about the looming debt ceiling and government shutdown, and the results reveal there is wide division, mainly between different age groups; 67% of Americans over age 44 said they were thinking of buying a new iPhone, however fewer than 25% said they had settled on a specific color; meanwhile, 78% of Americans under age 28 said they had purchased or would purchase the new Grand Theft Auto.

So, for the most part, it's business as usual.

JPMorgan is reportedly in talks with federal and state officials to settle mortgage securities probes for as much as $11 billion, which is not a hard and set figure. The sum being discussed would include $7 billion of cash and $4 billion of consumer relief. The discussions include the Department of Justice, SEC, the Department of Housing and the New York State attorney general. It was not immediately clear exactly how many sources of potential liability for JPMorgan would be covered by the settlement being discussed.

Meanwhile, Citigroup said it agreed to pay $395 million to Freddie Mac to resolve claims of potential flaws in roughly 3.7 million mortgages it sold to the housing finance company from 2000 to 2012. Citigroup said the settlement also covers potential future claims arising from the loans bought by Freddie Mac, the government sponsored purchaser and guarantor of home loans. The deal follows an agreement by Citigroup in July to pay $968 million to settle similar claims by Fannie Mae.

Meanwhile, Bank of America couldn't come to a settlement and so, for the first time, a major bank is going to trial over defective mortgage practices leading up to the 2008 financial crisis. Before today, no major bank has had to face a jury; just write a check and move on. Today the US Attorney's Office in Manhattan, in a civil trial, claimed Bank of America's Countrywide unit placed profits over quality in a massive fraud, selling shoddy mortgages to Fannie Mae and Freddie Mac, and claiming that the “documents and witnesses will show... the promise of quality was largely a joke."

The lawsuit is brought under the Financial Institutions Reform, Recovery, and Enforcement Act. The law, passed in the wake of the 1980s savings-and-loan scandals, covers fraud affecting federally insured financial institutions. The Justice Department estimates Fannie and Freddie has a gross loss of $848 million on the Countrywide HSSL loans, though their net loss on loans it says were materially defective was $131 million.

The Justice Department says the loans were pushed out through a Countrywide program called the "High Speed Swim Lane" - also called "HSSL" or "Hustle" - that began in 2007 and effectively eliminated loan quality checkpoints by removing underwriters from the review process and paid employees based on the volume and speed of the loans they pumped out.

And as BofA goes to court, new allegations from the National Fair housing Alliance claiming Bank of America continues to neglect foreclosed homes it owns in predominately minority neighborhoods even though it is under investigation for discriminatory practices. The complaint asserts that Bank of America has failed to adjust practices that are the subject of an ongoing HUD review. The nonprofit homeowner advocacy group examined 116 bank-owned properties in Memphis, Denver, Atlanta and a handful of other cities over the past year. Bank-owned homes in black and Hispanic neighborhoods were roughly twice as likely as those in white neighborhoods to show visible evidence of neglect and decay, such as broken windows and overgrown lawns

And remember back when all those bad mortgages were pooled together and then blew up and nearly resulted in a global financial meltdown, only averted by hundreds of billions of dollars of taxpayer funded bailouts? And remember there was an insurance company involved? AIG. Maybe you got angry about AIG paying huge bonuses just months after it nearly brought down the financial system and took a $182 billion bailout. Did that make you angry? Well, if it did, then you're exactly the same as a racist lynch mob in the Deep South in the Civil Rights era, according to AIG CEO Robert Benmosche.

Benmosche told the Murdoch Street Journal that the outcry over AIG's bonuses “was intended to stir public anger, to get everybody out there with their pitch forks and their hangman nooses, and all that -- sort of like what we did in the Deep South [decades ago]. And I think it was just as bad and just as wrong."
"It is a shame we put them through that,” he added, referring to those poor employees who got huge bonuses. Sure, I think it's obvious how receiving big bonus checks is almost exactly like hundreds of years of slavery and lynchings..., well almost.
Benmosche did not talk about the potential outrage of paying huge bonuses to to employees who did such a great job that the losses nearly destroyed a huge insurance company, creating a cascading collapse of ultra-risky derivatives that nearly destroyed the entire financial system, and civilization as we know it. Sure, you can see how that kind of quality work requires a bonus. So, to sum up: Not allowing financial alchemists who had "probably lived beyond their means" to carry on in the style to which they had become accustomed is exactly the same as lynching African-Americans in the Deep South.
Do you ever take a moment to contemplate what the economy might be like if we didn't have the banksters skimming their cut off everything? Imagine the abundance and prosperity.

The average American family pays $6,000 a year in subsidies to big business. That's over and above our payments to the big companies for energy and food and housing and health care and all our tech devices. It's $6,000 that no family would have to pay if we truly lived in a competitive but well-regulated free-market economy.The $6,000 figure is an average, which means that low-income families are paying less. But it also means that families (households) making over $72,000 are paying more than $6,000 to the corporations. The U.S. federal government spends $100 billion a year on corporate welfare. That's an average of $870 for each one of America's 115 million families. This includes "cash payments to farmers and research funds to high-tech companies, as well as indirect subsidies, such as funding for overseas promotion of specific U.S. products and industries...It does not include tax preferences or trade restrictions."

New research the "U.S. Government Essentially Gives The Banks 3 Cents Of Every Tax Dollar." It's calculated a nearly 1 percent benefit to banks when they borrow, through bonds and customer deposits and other liabilities. This amounts to a taxpayer subsidy of $83 billion, or about $722 from every American family.
The wealthiest five banks (JPMorgan, Bank of America, Citigroup, Wells Fargo and Goldman Sachs) account for three-quarters of the total subsidy, and without the taxpayer subsidy, those banks would not make a profit. In other words, "the profits they report are essentially transfers from taxpayers to their shareholders."

Tuesday, September 24, 2013

Tuesday, September 24, 2013 - Give Me Energy

Give Me Energy
by Sinclair Noe

DOW – 66 = 15,334
SPX – 4 = 1697
NAS + 2 = 3768
10 YR YLD - .05 = 2.65%
OIL - .30 = 103.29
GOLD + .80 = 1324.10
SILV + .10 = 21.84

The big unknown this week is the possibility of a government shutdown Sunday night. A few moments on that and then I'll get to my main topic here, which deals with energy. The shutdown could happen; with Congress, anything could happen. I've been trying to figure out the likelihood, and I don't think it is likely, although it could still happen. Of course the battle is over defunding Obamacare. And I remember the old rules for how a bill becomes law, and the checks and balances of our democratic republic.

The Affordable Care Act was duly enacted by a majority of both houses of Congress, signed into law by the President, and even upheld by the Supreme Court. The Constitution of the United States does not allow a majority of the House of Representatives to repeal the law of the land by defunding it. If that were the case, no law is safe. A majority of the House could get rid of unemployment insurance, federal aid to education, Social Security, Medicare, or any other law they didn't like merely by deciding not to fund them. If that were the case, then you could control everything in government with a simple majority in the House of Representatives; it would render every other branch of government superfluous.

There is a process for repealing a law; both houses enact a bill that repeals the old law, which must then be signed by the President. In the event of a presidential veto, the new bill can become law by over-riding the veto with a two-thirds vote of the House and Senate.

That's not going to happen, and so all the talk about a government shutdown is moving on a wrong path, and technically there should be no shutdown. We could still have a shutdown, but it's unlikely, or at least it would have to happen in a manner not yet laid out.

The Clinton Global Initiative is holding its annual meeting in New York this week. With demand for everything from food and water to rare earth minerals expected to continue to rise, companies and governments are increasingly undertaking a variety of efforts to develop a more sustainable supply chain, one of the topics highlighted at this week's meeting. Corporate leaders give themselves a lousy grade on their efforts to develop sustainable supplies of natural resources strained by a growing global population and a rapidly expanding middle class of consumers.

A recent survey conducted for the UN Global Compact found that more than two-thirds of CEOs of global corporations surveyed do not believe we are on track to meet the demands of a growing population. There are plenty of excuses for short-term complacency but looming in the not-so-distant future is resource scarcity, as in no water; no energy. Important stuff. Big challenges, and what many people overlook is even bigger opportunities.

There are 3,200 utilities that make up the US electrical grid, the largest machine in the world. These power companies sell $400 billion worth of electricity a year, mostly derived from burning fossil fuels in centralized stations and distributed over 2.7 million miles of power lines. Regulators set rates; utilities get guaranteed returns; investors get sure-thing dividends. It’s a model that hasn’t changed much since Thomas Edison invented the light bulb. And it’s doomed to obsolescence.

What’s afoot is a confluence of green energy and computer technology, deregulation, cheap natural gas, and political pressure that poses a mortal threat to the existing utility system. Just as 30 years ago, almost nobody had cell phones – just a few, big brick-like devices; today the cell phone has supplanted the land lines in most US homes. Likewise, the grid will become increasingly irrelevant as customers move toward decentralized homegrown green energy. Rooftop solar, in particular, is turning tens of thousands of businesses and households into power producers. Such distributed generation, to use the industry’s term for power produced outside the grid, is certain to grow.

Some utilities will get trapped in an economic death spiral as distributed generation eats into their regulated revenue stream and forces them to raise rates, thereby driving more customers off the grid. Some customers, particularly in the sunny West and high-cost Northeast, already realize that they don’t need the power industry at all.

A report issued earlier this year by the Edison Electric Institute (EEI), the utilities trade group, warned members that distributed generation and companion factors have essentially put them in the same position as airlines and the telecommunications industry in the late 1970s. “U.S. carriers that were in existence prior to deregulation in 1978 faced bankruptcy,” the report states. “The telecommunication businesses of 1978, meanwhile, are not recognizable today.”

Worldwide revenue from installation of solar power systems will climb to $112 billion a year in 2018, a rise of 44 percent, taking sales away from utilities, according to analysts at Navigant Research, which tracks worldwide clean-energy trends. A July report by Navigant says that by the end of 2020, solar photovoltaic-produced power will be competitive with retail electricity prices—without subsidies—“in a significant portion of the world.” Green-thinking communities such as San Francisco and Boulder, Colo., are starting to bypass local utility monopolies to buy an increasing portion of power from third-party solar and wind providers. Chicago recently doubled the amount of power it buys from downstate wind farms.

The solar and distributed generation push is being speeded up by a parallel revolution in microgrids. Those are computer-controlled systems that let consumers and corporate customers do on a small scale what only a Consolidated Edison or Pacific Gas & Electric could do before: seamlessly manage disparate power sources without interruption. Microgrids have long been used to manage emergency backup power systems. A 26-megawatt microgrid completed in 2011 kept the power on at the US Food and Drug Administration’s White Oak research center in the aftermath of Hurricane Sandy last year. It also saves the federal government an estimated $11 million a year in electricity costs. The microgrid’s ultimate potential, however, is in turning every person, company, or institution with a renewable energy power system into a self-sustaining utility. Imagine your house switching from power it generates itself to power from the grid the way a hybrid car switches from battery power to gasoline.

Businesses are adopting solar and smart microgrids at an escalating rate to beat rising power costs and burnish their green cred. Verizon is investing $100 million in solar and fuel-cell projects that will directly supply 19 offices and data centers in three states. Wal-Mart, with 4,522 locations in the US, expects to have 1,000 solar-powered stores by 2020. MGM Resorts International’s Mandalay Bay resort convention center in Las Vegas hired NRG to install a 6.2-megawatt solar system—enough to meet as much as 20 percent of Mandalay Bay’s demand. Wal-Mart US President Bill Simon extolled the virtues of the company’s solar program in March when he told an analyst at an investor meeting that solar was often cheaper than grid power. Besides, Wal-Mart has a lot of roofs.

The grid continues to shrink—US power use actually peaked in 2007—as distributed generation captures an increasing share from utility-generated power. There won’t be much need for new large-scale transmission lines after that, except perhaps to gather and distribute power from remote wind farms. 

There will always be a need for utilities to provide what’s called the “base load”—the minimum amount of power to keep essential services running—but no need for as many utilities as there are now. Most coal- and oil-fired plants are destined for extinction. Natural gas is already wiping out coal, and it’s going to wipe out most nuclear. This is going to set off the scramble for market among existing utilities that the EEI report anticipates. There’s going to be a strong fight to preserve share.

The utility industry is big, powerful, and well connected, and it won't just roll over. The big complaint from the utilities is about subsidies. Somebody has to keep the wires intact for solar users to send electricity back into the grid. In other words, people who don’t want or can’t afford to install solar are paying for those who do. And that ends up shifting a lot of the costs of maintaining the system to those who do not have means.

The quick growth of solar has surprised many, and the subsidy arguments aren’t necessarily unreasonable, but the tide has turned. And the direct generation model now exists and with technological advancements, we won't just be talking about solar in a few years; soon, we'll see major new breakthroughs. Utilities hold their own fate in their hands. They can do nothing but complain or moan about technological change or they can try to adapt.

Renewable energy has distinct advantages over the fossil fuel energy. You don’t need large amounts of capital to build it, you don’t need to produce it all in one place and use high-voltage transmission lines to transport it somewhere else. The idea that we would continue to have a centralized form of ownership and control of that system is really inconsistent with what the technology enables. The parity of unsubsidized solar and conventional electricity is soon going to change the energy dynamic; it is inevitable, and the only question is timing. The technology and energy sectors will no longer simply be one another’s suppliers and customers; they will be competing directly. For the technology sector, the first rule is: Costs always go down. For the energy sector and for all extractive industries, costs almost always go up. Given those trajectories, the coming tussle between sustainable, renewable, direct generation energy and conventional energy is not going to be a fair fight.

Now back to familiar territory. Bank of America heads to trial this week over allegations its Countrywide unit approved deficient home loans in a process called "Hustle," defrauding Fannie Mae and Freddie Mac, the government enterprises that underwrite mortgages.

This would be the government's first financial crisis case to go to trial against a major bank over defective mortgages, barring a last-minute settlement.
The Justice Department filed the civil lawsuit in 2012, blaming the bank for more than $1 billion in losses to Fannie Mae and Freddie Mac, which bought mortgages that later defaulted. Since then, new evidence and pre-trial rulings by US District Judge Jed Rakoff have pared the case back. Bank of America has said the lawsuit's claims are "simply false".
The government lawsuit stems from a whistleblower case brought by former Countrywide Financial executive Edward O'Donnell. It centers on a program called the "High Speed Swim Lane" - also called "HSSL" or "Hustle" - that government lawyers say Countrywide initiated in 2007 as mortgage delinquency and default rates began to rise and Fannie and Freddie tightened underwriting guidelines. Countrywide pushed to streamline its loan origination business through the program, eliminating loan quality checkpoints and paying employees based only on the volume of loans they produced, according to the lawsuit.
The Justice Department say the Hustle resulted in "rampant instances of fraud and other serious loan defects," in the mortgages sold to Fannie and Freddie, despite assurances Countrywide had tightened underwriting guidelines.
Fannie and Freddie's estimated "gross loss" on loans in the Countrywide program was $848 million, according to court papers. The "net loss" - the loss caused by the portion of loans the Justice Department says were materially defective - was $131 million. While the jury will determine if the bank is liable, any penalty would be up to Rakoff, a judge well-known for his rulings in financial crisis cases.
In 2010, Rakoff rejected a $33 million settlement between Bank of America and the SEC over claims it did not properly disclose employee bonuses and financial losses at Merrill Lynch, which it acquired at the end of 2008.
The bank ultimately agreed to a renewed settlement paying $150 million in an accord Rakoff "reluctantly" approved. In November 2011, he rejected a $285 million settlement between the SEC and Citigroup, challenging the long-standing practice of settlements without admissions of wrongdoing.
Meanwhile, a US credit union regulator has sued 13 banks over alleged manipulation of LIBOR, claiming credit unions lost millions of dollars in interest income as a result of rate-rigging.
LIBOR, which stands for the London Interbank Offered Rate, is the benchmark interest rate for trillions of dollars of credit cards, mortgages, student loans, variable interest-rate notes and other lending products. The banks are accused of artificially manipulating LIBOR between 2005 and 2010 by falsely reporting the interest rates at which they were able to borrow. A couple of banks have already settled with some regulators; you know, without admitting wrongdoing.
The complaint, filed in US District Court in Kansas, says the credit unions held tens of billions in investments and other assets that paid interest streams pegged to LIBOR. The lawsuit says that as a direct result of the conspiracy, which violated state and federal anti-trust laws, the credit unions received less in interest income than they were otherwise entitled to receive.
The National Credit Union Administration brought the lawsuit against JPMorgan Chase, Credit Suisse Group, UBS and 10 other international banks on behalf of five failed credit unions. For JPMorgan, this is just part of an ongoing and seemingly endless stream of lawsuits.
Why are we not surprised that nothing has been done to break up the too-big-to-fail banks, the biggest now being Dimon's? Don't be fooled by the occasional fines; the banks have used the interest-free money to grow ever larger and more unaccountable in their behavior.
Even last week's nearly $1 billion SEC settlement over the London Whale trading debacle, while mentioning the despicable behavior of JPMorgan's chief executive, fails to utter Dimon's name, and the whole issue of misinforming investors and the public is conspicuously absent from the SEC findings and settlement.

After the SEC condemnation of JPMorgan's "egregious breakdowns in controls" and conclusion that "senior management broke a cardinal rule of corporate management" to honestly inform the board of directors, Dimon promised to beef up the compliance department. This was just the sort of commitment Dimon made in 2006 when he hired Stephen M. Cutler, who had been head of the SEC Division of Enforcement, to be JPMorgan's general counsel. Yes, the same Stephen Cutler who was in charge of legal and compliance activities worldwide at the time of the London Whale fiasco.  

Monday, September 23, 2013

Monday, September 23, 2013 - Almost Reality

Almost Reality
by Sinclair Noe

DOW – 49 = 15,401
SPX – 8 = 1701
NAS – 9 = 3765
10 YR YLD - .03 = 2.70%
OIL – 1.37 = 103.38
GOLD – 3.30 = 1323.30
SILV - .16 = 21.74

If we remain on our current trajectory, in about one week the government will shut down. It doesn't shut down everything and not all at once, but it is a pretty big deal. Here's how it might affect you:

Many federal workers will be furloughed, and they might even receive pay retroactively. Not all fed workers stay home; air traffic controllers, meat inspectors, and a few others will remain on the job. The post office will continue to deliver mail. National parks will be closed. The military will still report to duty but they will be paid in IOUs ( I still haven't heard if they can cash the IOUs to buy bread but I'm sure somebody is figuring that out). Social Security checks will be mailed more or less as usual. No gun permits will be issued. The IRS will continue to collect taxes. No government loans to small businesses. Trash collection in Washington DC will stop; that's a federal job and not considered essential (give it a couple of weeks and that might change). The Republicans want to defund Obamacare in exchange for funding the government. But the health care act at the center of this storm would continue its implementation process during a shutdown. That's because its funds aren't dependent on the congressional budget process. And finally, both the Senators and the House of Representatives will continue to get a paycheck. Go figure. All the politicians say a shutdown is a bad idea, so I guess that means there's a good chance it will happen.

Of course last week, the market moving news was “no taper” from the Federal Reserve. The Fed is still concerned about a variety of things, including frothy markets, and so since the “no taper” announcement, or actually a non-announcement, the Fed has been talking down the markets. Last Friday, St. Louis Fed President James Bullard said taper could happen in October.

Today, Dallas Fed President Richard Fisher warned that by standing pat the Fed had hurt its credibility and said he had urged colleagues to support a $10 billion reduction in the Fed's bond-buying program at last week's meeting.
At a separate event, William Dudley, president of the Federal Reserve Bank of New York, said in a speech the timeline that Fed Chairman Ben Bernanke articulated in June for scaling back the central bank's stimulus measures is "still very much intact," as long as the economy keeps improving. Dudley says the Fed still needs to push hard against threats to the economic recovery, and fiscal uncertainties in particular "loom very large right now." 

Over the weekend there was an election in Germany. Angela Merkel won – big. Merkel's Christian Democratic Union and its sister party, the Christian Social Union, won 41.5% of the vote, with analysts calling the win a personal victory for the 59-year-old. Merkel is on track to overtake Margaret Thatcher as Europe's longest-serving female leader. The historical dimensions of the election were clear, with Merkel set to become just the third postwar chancellor to secure three election wins, after Konrad Adenauer and Helmut Kohl. She has also bucked the European trend by becoming the only leader in the eurozone, from left or right, to be re-elected since the snowballing of the eurozone crisis in 2010. Out of 17 countries, 12 governments have fallen, indicating how protected Germans feel from the crisis under Merkel's leadership.

Germany is not an island, it has benefited from membership of the euro, presenting it with an in effect undervalued currency, and the fortuitous explosion in demand for its high-quality manufactured goods by China; but Germany also has some real concerns, such as income inequalities, awful demographic projections, faltering investment levels, crumbling infrastructure, and inadequacies in higher education and in research and development. Post-election Germany will have a similar approach to pre-election Germany: legalistic, cautious and resistant to grand plans and gestures, no matter how much its European neighbors are looking to it to act.

Today marks an historic day for entrepreneurship and early stage finance, as Title II of the JOBS Act goes into effect. For the first time in nearly 80 years, private startups and small businesses can raise investment funding publicly, through general solicitation including: radio, TV, print, and internet, including sites like Facebook or Twitter to help spread the word, and taking in investment online via equity crowdfunding sites who power the investment process in a more open and collaborative way.
Before today, publicly advertising the fact that you were raising investment (general solicitation) was against the law for early stage private companies. Fundraising from the general public was the exclusive domain of larger companies who can afford to spend the millions it takes to become listed on stock exchanges like the NASDAQ.
But now, as a result of Title II, early stage investing has become more public, kicking off one of the largest new capital markets in our time. Back in 1933, when the Securities Act was passed, it created a ban on general solicitation (advertising investments to the general public for private companies). At the time, radio was the dominant communication medium, and there was little access to open information, education, or disclosures to help protect investors.
While these laws passed in 1933 helped reduce fraud at the time, they also had unintended consequences that hurt honest everyday small business owners and entrepreneurs, restricting them in their efforts to attract potential investors and critical seed and growth capital.
The world has changed since 1933, and early stage investing has been long overdue to catch up. Today, as these laws finally roll out, we now have clarity and a path for open and public fundraising for startups and small businesses. In short, companies who file Form D with the SEC prior to doing so can generally solicit to the public. Within 15 days from soliciting they must disclose additional information about the solicitation.
To simplify the details down for you, here are the basics:
For Startups & Small Businesses:
You can now generally solicit and advertise publicly; only accredited investors can actually invest in generally solicited companies; file Form D with the SEC before you begin soliciting, letting them know you will; disclose details about your general solicitation to the SEC within 15 days from first solicitation; strict verifications done by companies are required to confirm that each investor is accredited; the penalty for not adequately meeting and following general solicitation requirements with the SEC is being banned from fundraising for a full year.
For Investors:
Only accredited investors can invest in companies who generally solicit; qualifying as accredited means having $1 million in net worth, or making over $200,000 a year for the past 3 years; investors will need to prove accredited investors status, which can be done through written confirmation by a CPA, attorney, investment advisor, or Broker-Dealer, or income-related IRS forms.
 For companies fundraising, the growth of these capital markets and the movement towards online systems and investment crowdfunding is going to bring much greater potential access to capital and opportunity. Most early stage entrepreneurs don’t have an existing network of wealthy potential investors, and fundraising is hard.
Now that the general solicitation ban is lifted, within a matter of days startups and small businesses can leverage the internet and other marketing tools for their fundraising, to reach potentially thousands of potential investors. Prior to this, reaching a targeted audience of 20 or more active investors often took 4 to 6 months.
According to current regulations, businesses may not raise money with non-accredited investors. Title III of the JOBS Act will create rules and a path for non-accredited investors to begin investing in companies, but the SEC has yet to finalize any rulings. The timing of Title III is expected to include a proposal and a commenting period coming this Fall, and for finalized rulings and a vote in early 2014.
It's a brave new world, and as always, caveat emptor. Some people think the JOBS Act will lead to fraudulent activity by startups, but we don't need the JOBS Act for that. Today we learn the Justice Department is preparing to sue JPMorgan on civil violations of securities laws in offering mortgage bonds from 2005 to 2007 that were backed by subprime and other risky residential mortgages. The bank disclosed in August that federal prosecutors in California were conducting criminal and civil investigations into the bank's mortgage securities.

Five years after the financial crisis, sparked, at least in part by banks and mortgage lenders who claimed that toxic loans were in fact AAA-worthy -- wiped out trillions of dollars of wealth and led to demands for accountability. There had been widespread fraud, after all, and somebody had to pay. And so federal prosecutors teamed up with three other federal agencies to launch and execute a major criminal investigation. And finally they have a high profile indictment.

Teresa and Joe Giudice, (I'm not sure about the pronunciation. Judy-Chay?) stars of Bravo's "Real Housewives of New Jersey." Their crime? Lying to banks on mortgage applications. U.S. Attorney Paul J. Fishman said, "Everyone has an obligation to tell the truth when dealing with the courts, paying their taxes and applying for loans or mortgages. That’s reality." Get it? The prosecutor told a funny; that's reality, because they are on a reality TV show. While the federal prosecutors were cracking jokes and patting themselves on the back for taking down the Giudices, the leaders of the Wall Street firms actually responsible for doing catastrophic damage to the financial system remained free to enjoy the money they made while overseeing the near-collapse of the global economy. That's reality.