Wednesday, October 02, 2013 - Genie Out of the Bottle

Genie Out of the Bottle

by Sinclair Noe

DOW – 58 = 15,133
SPX – 1 = 1693
NAS – 2 = 3815
10 YR YLD - .02 = 2.63%
OIL + 1.76 = 103.80
GOLD + 28.80 = 1317.30
SILV + .57 = 21.83

So, the heads of the biggest banks, including Lloyd Blankfein of Goldman Sachs and Jamie Dimon of JPMorgan and Brian Moynihan of Bank of America, and a list of others (apparently Dick Fuld from Lehman Brothers couldn't afford the bus fare); so all these big banksters went to the White House today to discuss the shutdown. Heaven help us all. The President is getting advice on the economy from the very people who crashed the economy a few years ago. And then later in the afternoon the president met with lawmakers, not to negotiate but just to meet with the people that created the shutdown. Can everybody, please, just step away from the crack pipe? Maybe the politicians should try meeting with people that didn't cause the problems.

The meeting with the banksters, set up by the Financial Services Forum, a Washington-based trade group representing CEOs of the largest Wall Street banks, was part of an effort by the administration to leverage the business community’s clout in breaking the stalemate. Administration officials said pressure from the business community was effective in past fiscal fights. In other words, the financial industry threatened to take away the campaign contributions if the politicians persist in driving the economy off a cliff.

The impending debt ceiling was more of a concern for the banksters than the government shutdown. This assessment does absolutely not mean that the shutdown is no big deal. It’s a very big deal, it will harm people who need help from public employees and won’t get it. It will make government less efficient even before and after the shutdown, as now resources will flow to managing this and future potential shutdowns rather than focusing on the core business of government. It affects many more than just federal employees, but also contractors, and all the businesses that cater to the federal employees and the contractors. The initial hit on GDP will likely be small, but the longer it lasts, the bigger the hit. 

There will be a hit to lower income people. The Special Supplemental Nutrition Program for Women, Infants and Children (WIC) will not issue new payments to states, meaning that any state that has already spent all its federal food assistance money will be without recourse; meaning there are a lot of families that are going to be scrambling to put food on the table and a lot of families that won't put food on the table.

Congress didn’t just miss the deadline on Monday night to pass a continuing resolution that would keep the government open. It also missed the deadline to reauthorize the Temporary Assistance for Needy Families (TANF) program, formerly known as welfare.

The TANF block grant that the federal government gives to states to share the cost of welfare programs was scheduled for reauthorization in 2010, but rather than reauthorizing it then Congress instead extended it multiple times. The most recent extension was part of a continuing resolution passed in March that funded the government through the end of September 2013, so it expired Monday night along with all other government funding.

That means that as of yesterday, states stopped receiving the funds from the block grant. This shouldn’t impact beneficiaries, at least in theory. Benefits are typically paid on the first of the month. So, if the shutdown ends soon, not a big problem. If the shutdown drags out, big problem, and it won't just be a big problem for poor people.

By the way, in case you missed it, the reason for the shutdown is no longer a valid point of discussion. We got to the shutdown because of Republican demands that the Obamacare law be defunded or delayed, but that cat is out of the bag, the toothpaste is out of the tube, the genie is out of the bottle. In the past two days millions of people have signed up for Obamacare and if you want to undo those contracts..., well you can't. And even if the Democrats agreed to a delay in the individual mandate, you've still got millions of contracts.

Volume at HealthCare.gov continues to be high, with 4.7 million unique visits in the first 24 hours, and the call center receiving more than 190,000 calls and more than 104,000 Web chats requested. It's estimated that 7 million people will sign up for health care during the enrollment period. Who knows? Maybe more. The Republicans have failed to kill the law. Even if Republicans gain control of the Senate next year, President Obama will veto legislation intended to destroy his signature policy.

The soonest Republicans could damage Obamacare would be 2017, and that is assuming the new president is a Republican. By that point, most of the kinks in implementation will be worked out and Americans will have become accustomed to Obamacare. Parents will appreciate the fact that their young adult children, married or single, are eligible to remain on their parent’s insurance until they are 26. People with pre-existing conditions will be glad they don’t have to worry about being denied health care. Those who become seriously ill will be relieved to know that their insurance company can’t drop them now.

Poor families will want to keep the insurance they now receive thanks to the subsidies provided under the law. And they will be grateful that Medicaid eligibility was expanded to people with incomes up to 133 percent of the poverty line. Of course, that assumes their state goes along with that expansion. Most states have agreed to do so.

So, you kind of have to wonder what the reason is behind continuing the shutdown.

The banksters visiting the White House today are more concerned with the upcoming debt ceiling than the shutdown. The problem with the debt ceiling is that it could crash, well everything; we just don't know. Or as Blankfein said: “There’s precedent for a government shutdown; there’s no precedent for default. We really haven’t seen this before and I’m not anxious to be part of the process to witness this.”

What happens to US Treasury bonds? What happens to the dollar? What happens to the banks that hold treasuries and dollars? We just don't know. The closer we get to a default, the more panicky the markets will get. There are lots of ways investors can try to take advantage of market chaos, using options and buying inverse indexes, for example; or many people will just step to the sidelines; but there’s one sure-fire way to make money when things get hairy: speed. No one likes government-orchestrated chaos like high-frequency traders do.

While speed traders can make money in any number of ways, trading any number of assets, they thrive off of two things in particular: trading volume and market volatility. They like it when markets are deep and choppy, when there are lots of people trading, and when prices move around a whole bunch. In other words, the high speed traders are drooling over the prospect of a panic.

In August 2011, as congressional Republicans and Democrats took their fight over the debt ceiling to the brink, the markets went into pure freak-out mode. On 16 of the 23 trading days in August that year, the Dow Jones industrial average moved by at least 100 points—including a week where the Dow moved at least 400 points for a record four consecutive days. Daily trading volumes spiked from around 7 million shares to 18 million shares during the second week of August. And while volumes calmed back down, the market chop lasted all the way into November. August 2011 was the most profitable month for high-frequency traders since the financial crisis spun out of control in September 2008.

In the past week, the price of credit default swaps on treasuries has spiked; this is one way to buy protection against US Treasuries; though prices are still nowhere near where they were heading into the debt-ceiling crisis two years ago.

We've been following the story of the JPMorgan big settlement deal, and there is an important new development. You remember that last week we heard news that JPMorgan CEO Jamie Dimon had met with Attorney General Eric Holder. We know they talked about a possible settlement to resolve investigations into JPMorgan's crisis-era peddling of mortgage backed toxic waste. We don't know details of the meeting but Dimon exited with cufflinks, not handcuffs. It looks like there might be a settlement to the tune of $11 billion, but actually, it would be $7 billion in cash and $4 billion in other ways, like offering homeowners short sales instead of foreclosures; they get to count that toward their fine. There are still issues of liability to be determined.

We've talked about how Jamie Dimon was granted extraordinary access to the attorney general, the kind of access that basically nobody else gets. Now, here's the latest development. If there is a settlement, JPMorgan could reap a massive tax deduction from the settlement that would cost the U.S. Treasury $3.85 billion. More than half of the cash settlement could be written off, and JPMorgan could actually collect that amount in tax subsidies.

Congress and federal regulators face a choice that is made clear by JPMorgan's newest run-in with the law: they can close the tax loophole that allows corporations to deduct their settlement payments from their taxes, or they can continue allowing corporations like JPMorgan to walk away from settlement negotiations with billions in tax windfalls in their pockets; a reward for bad behavior.