Wednesday, January 09, 2013 - Miscellaneous Financial News

Miscellaneous Financial News
by Sinclair Noe

DOW + 61 = 13,390
SPX + 3 = 1461
NAS + 61 = 13,390
10 YR YLD -.02 = 1.85%
OIL +.01 = 93.16
GOLD – 2.80 = 1659.00
SILV - .05 = 30.46

AIG, the insurance company won't join ex-CEO Maurice "Hank" Greenberg's lawsuit against the US government over the insurance giant's financial crisis bailout. Greenberg has filed a $25 billion lawsuit accusing the government of violating shareholders' rights by bailing out AIG, because the terms of the bailout weren't as cushy as Greenberg wanted. Thank you, AIG.

Earlier this week I told you about an $8.5 billion settlement announced between the Federal Reserve and the Office of the Comptroller of the Currency with 10 big mortgage services, including Citigroup, JPMorgan and Wells Fargo over botched foreclosure claims. Now, Goldman Sachs and Morgan Stanley and other banks are expected to agree to a $1.5 billion settlement with the regulators sometime this week. The other banks haven't been officially identified but best guess is that the group includes HSBC, Ally, EverBank, and OneWest Bank.

Goldman got into the mortgage servicing business by purchased Litton Loan Servicing and Morgan Stanley bought Saxon Capital. The Fed has ordered both firms to conduct case by case reviews of foreclosures after widespread mistakes were discovered in how the firms processed home seizures.

Meanwhile, Morgan Stanley plans to cut about 1,600 jobs, nearly 3 percent of its workforce. The cuts will focus on senior ranks at the bank. About half of the cuts will be in the U.S. Morgan Stanley's investment banking unit has been asked to cut about 6 percent of its staff.

Remember when the government offered an amnesty program for people who were evading taxes by holding funds in Swiss bank accounts; admit it, pay the tax plus penalties and all will be forgiven. Well, there was a hitch; taxpayers whose identities become known to the IRS before the clients come forward voluntarily are generally not eligible for the reduced fines and penalties.

UBS, the Swiss banking giant came under criminal investigation for its work selling tax-evasion services to wealthy Americans. Three years ago, UBS entered into a deferred prosecution agreement, agreed to pay a $780 million fine and later turned over more than 4,000 client names. More than four dozen American clients of Swiss and Swiss-style banks have been charged or indicted in recent years; today a 79 year old Florida woman pleaded guilty to criminal charges of tax evasion through accounts at UBS. She faces six years in prison, but probably won't face that much. She actually tried to enter a voluntary disclosure program with the Internal Revenue Service that would have allowed her to pay reduced fines and penalties, but the IRS already had her name.

The government will stop sending out Social Security checks as on March 1^st. No more paper checks. Instead, the Treasury Department will distribute funds electronically, either via direct deposit or on a prepaid "Direct Express" card. Most Social Security benefit recipients already receive their payments electronically, but 5 million checks are mailed each month. Over the next ten years, the move away from paper checks is expected to save about $1 billion.

As you have likely heard, President Obama plans to put Tim Geithner out of his misery tomorrow by nominating Jack Lew for Treasury Secretary. Lew is known for being Obama’s White House Chief of Staff and also for a truly bizarre signature. And, should he be confirmed and subsequently have his name printed on a bunch of dollar bills, Lew will likely be forced to come up with something that actually looks like it spells a name and not a Jackson Pollack painting.

US oil production topped seven million barrels per day for the first time since March, 1993 and is nearly 20 percent above the amount produced at this time last year. The latest weekly data from the Energy Information Administration shows that imports fell as domestic production continues to increase. The government now predicts the US industry could pump 14 percent more oil this year alone. The use of non conventional drilling techniques in places like North Dakota and Texas has created an explosion in US production to the point where the US is expected to pass Saudi Arabia in crude production by 2020.

At the same time, the industry is developing more pipeline capacity to carry crude from storage in Cushing, Okla. to the Gulf Coast refining areas. That should continue to drive the trend, create more refined product for the US and export markets, and the EIA says that should bring down oil prices over the next several years.

That's the good news. The bad news is that we're still burning fossil fuels, and the climate is getting hotter, not just warmer – hotter. The average temperature in the continental US last year was 55.3 degrees; that's a full degree higher than the previous record. Last year’s weather in the United States began with an unusually warm winter, with relatively little snow across much of the country, followed by a March that was so hot that trees burst into bloom. The soil dried out in the March heat, helping to set the stage for a drought that peaked during the warmest July on record. The drought covered more than 60% of the nation; comparable to a severe drought in the 50's and almost as bad as the Dust Bowl days of the 1930's. The drought killed corn and soybean crops, and forced ranchers to thin their herds. The Mississippi River's levels dropped so much that barge traffic backed up and even came to a standstill; stretches of it are deserted like a 'ghost town,' and some of it could be closed altogether as it heads below 3 feet in depth.

Don't forget the tornadoes, the Hurricanes (Isaac and Sandy), derechos, and of course, wildfires. Plain and simple, we need a cold winter with lots of snow, and then we'll need lots of rain to counter the drought. If we don't get it, then 2012 might seem mild. The drought of 2012 likely sliced one percent off the GDP. The nation was hit by 11 environmental catastrophes that cost at least $1 billion in losses. Climate is extremely complex. We may yet see some cold years. There is some thinking that the melting of ice at the poles could temporarily cool the oceans and reduce temperatures for a while. But the longer term trend is not only toward hotter, it is toward a kind of hotter that human beings may find it difficult to survive.

The Baseball Writers' Association of America's ballot for this year's Hall of Fame class listed 37 players, including 24 new candidates, including Barry Bonds – the all time leader in home runs, and Roger Clements – a seven-time Cy Young Award winning pitcher. To be inducted, a player must receive a vote on at least 75 percent of the ballots returned. The Baseball Hall of Fame's Class of 2013 will not have any new inductees from the ranks of the recently retired. It's a dark day in Cooperstown and steroids are the reason.

The Consumer Electronics Show is wrapping up in Las Vegas. If you were waiting for a 110 inch, high definition flat screen TV, it made its debut this week. On the other end of the spectrum was a smart watch; it syncs up with your smartphone so you can get emails, and text and other messages on a 1-and-a-quarter-inch screen. There were cameras everywhere; on top of bicycle helmets, built into racing goggles. There were pouches to let you use your smartphone underwater. There were 3D printers. They've developed mind over matter devices, or at least you can use your mind to transmit signals to electronics that will then move themselves. All you Jedi warriors need to start your training. And then there was one booth selling antennas; yep, big old fashioned television antennas.

The Partnership for Civil Justice Fund obtained a Freedom of Information Act request that revealed the FBI coordinated at length with local law enforcement, private financial institutions, the Federal Reserve and other government agencies to monitor the Occupy Wall Street movement’s activities. One of the things I learned was that the Federal Reserve System has its own commissioned law enforcement arm, the Federal Reserve Police, which is allowed to operate in uniform or plainclothes. Apparently, the FBI treated the Occupy movement as a potential criminal and terrorist threat even though the agency acknowledges in documents that organizers explicitly called for peaceful protest and did "not condone the use of violence" at occupy protests. The idea was apparently to crackdown on the Occupy movement, and it seems to have worked. Meanwhile, how many of the banksters ended up in jail? And a funny thing happened while all those private and federal law enforcement types merged together to crush some protesters in the park...,

Someone here at the radio station today told me her Bank of America credit card was being replaced. She talked to the bank and they said there was a problem with hackers. I don't know if there is a direct connection but at least nine financial institutions have been hit by hackers since September; more attacks are expected. And part of what makes them suspicious is that they seem calculated not to steal account data or money, but instead to disrupt the banking system. Government officials say Iran is behind the attacks. The distributed denial of service attacks, which seek to overload an online system's ability to respond to requests, targeted Bank of America, Citigroup, Wells Fargo, U.S. Bancorp, PNC, Capital One, BB&T, HSBC, and Fifth Third Bank. You might want to make sure your credit cards are still working.

Tuesday, January 08, 2013 - Thank You, America

Thank You, America

DOW – 55 = 13,328
SPX – 4 = 1457
NAS – 7 = 3091
10 YR YLD -.03 = 1.87%
OIL +.06 = 93.25
GOLD + 13.20 = 1661.10
SILV + .24 = 30.50

Some people have debated what we should do if the banks get into trouble again; should they be bailed out? The Too Big to Fail Banks of 2008 are even bigger today, and if one collapses, then there would likely be a cascading effect through the global financial system. So, if a big financial institution gets into trouble, should there be a bailout, or do we just say “tough luck”? You probably have an opinion, and reasonable people can debate the issue, or at least there could be room for reasonable debate, until now. As of today, there is no more debate.

If you go to Webster's Dictionary and look up the word “ingrate”, you will find a picture of Maurice “Hank” Greenberg; the guy who founded American International Group, AIG, the huge insurance company that in 2008 accepted a $182 billion dollar bailout from the Treasury. Hank Greenberg, the former CEO of AIG is contending in a lawsuit that the government treated the company’s shareholders too harshly when carrying out its 2008 rescue of the insurance giant. AIG is weighing whether to join the lawsuit, filed by Mr. Greenberg’s investment firm, Starr International Company, which owns about 12% of AIG. In addition to founding AIG, Greenberg gained notoriety for a high profile fraud case in 2005 that pushed him out of his CEO role at AIG. Greenberg was accused of using sham transactions to mask the company's financial position.

So far, AIG has not joined in the suit with Greenberg. The choice is not a simple one for the insurer. Its board members, most of whom joined after the bailout, owe a duty to shareholders to consider the lawsuit. If the board does not give careful consideration to the case, Mr. Greenberg could challenge its decision to abstain. Should Mr. Greenberg snare a major settlement without A.I.G., the company could face additional lawsuits from other shareholders. In other words, the board of directors may have a fiduciary duty to sue the government.

One of Starr International’s major arguments is that AIG’s bailout terms were far tougher than those granted to other large financial firms. Greenberg has accused the New York Fed of using the rescue to bail out Wall Street banks at the expense of shareholders, and of being a "loan shark" by charging exorbitant interest of 14.5 percent on the initial loan. 

The Treasury did force AIG to do things which were against their very nature. AIG was forced to pay full settlement on credit default swaps; one-hundred cents on the dollar, to the tune of more than $12 billion to Goldman Sachs alone. Now remember these credit default swaps were a form of insurance but they weren't insurance, and they were and remain largely unregulated. CDS is not like insurance in that it does not require reserves be held to pay off claims. The whole idea behind CDS was to collect premiums without ever paying claims. To force AIG to make full payment on a CDS claim was unprecedented and now Greenberg claims it was cruel and unusual punishment.

AIG’s cash needs and internal failings were in many ways far more serious than those of other institutions. In fact, the company was in such dire straits after the rescue that the government eased up on the terms. The concessions were considerable.

In early 2009, the Federal Reserve cut the interest rate on a big loan to AIG, saving the company about $1 billion a year in interest. Then the Treasury exchanged $40 billion of preferred shares for new ones that effectively paid no cash dividends to taxpayers. If it had paid the originally agreed 10 percent dividend on all these and other preferred shares, the insurer would have paid roughly $20 billion from the beginning of 2009 to the end 2012. Instead, the preferred shares were converted into common stock, which the government later sold, purportedly turning a profit of about $22 billion.

The bailout eventually worked out for AIG. After losing half its value in 2011, the stock rose more than 52 percent in 2012, tripling the gains of the broader S&P insurance index. Things worked out so well for AIG that they are now running a television ad campaign called “Thank You, America” in which it offers its gratitude for the bailout.

Mark Twain was right; truth is stranger than fiction because fiction is obliged to stick to possibilities.

Seriously, thank you, America.

There has been a lot of talk about breaking up the big banks, cutting them down into smaller banks that don't threaten the global financial system. The Dallas Federal Reserve has called for breaking up the biggest banks. Texas Republican Jeb Hensarling, the new Chairman of the House Financial Services Committee has expressed concern about the Too Big to Fail banks. Elizabeth Warren was elected in Massachusetts and she will sit on the Senate Banking Committee. Even Sandy Weill and John Reid, co-founders of Citigroup, which originally pushed through legislation which destroyed Glass-Steagall; they are now proposing that Glass-Steagall be reinstated and the biggest banks be broken up. The timing would seem to be right. Don't hold your breath.

The bank lobby will fight any attempts to break up the banks. Eventually, we will come back around to a big bank or insurance company on the verge of collapse and begging for a bailout; it's inevitable; the banksters continue to gamble in the derivatives markets, and eventually all gamblers lose, and when they lose.., please, please remember the story of Hank Greenberg and AIG.

Alcoa has kicked off the fourth quarter earnings reporting season by posting a profit of $242 million, or 21 cents per share, compared with a net loss of $191 million, or 18 cents per share, in the year-ago period. Excluding one-time items, net income was $64 million, or 6 cents per share, in line with average analysts' expectations of 6 cents.

Alcoa is supposed to provide clues about earnings, but I've never found a good correlation. Instead the earnings season has become little more than an exercise in obfuscation. Take the phrase “excluding one-time items”; that means the cost of doing business. Lucy Kellaway at Financial Times has come up with what she calls the Golden Flannel Awards, a mock celebration of corporate malarkey. Here's an example from one annual report: “In the wholesale channel, Burberry exited doors not aligned with brand status and invested in presentation through enhanced assortments and dedicated customised real estate in key doors.” I don't know what that means, but it might surprise you to learn that Burberry sells raincoats and they don't manufacture doors. Another company, called Record, does manufacture doors, which they call “entrance solutions”.

Sometimes companies create new words, such as: solutioneering, sustainagility, or innovalue. Sometimes, companies say things that are just designed to hide reality; for example, Citigroup issued a press release that talked about “optimizing the customer footprint across geographies,” which means they fired 1,100 workers. Citigroup also got the top prize by declaring that from now on they would offer “client-centric advice”. Sounds good until you think about what they've been offering up to now.

I still think it will be hard to top AIG's “Thank you, America.”

Anyway, welcome to earnings reporting season.

So, I was away on vacation over the holidays, but I'm catching up on the fiscal cliff deal. It has some interesting provisions; lots of little and not so little special deals, especially in the form of tax breaks. For a bunch of lawmakers who were supposedly so busy and so involved in "negotiations," they were remarkably productive when it came to special interests.

There's $9.7 billion over the next 10 years on additional subsidies for student loans or $5.6 billion for adoptions, although both those figures seem like a lot considering that employer-provided childcare is getting only $209 million. More money is at stake in subsidies for various businesses, $46 billion, and $18 billion for alternative energy. 

There's a special 50% tax credit for maintaining railroad tracks is projected to cost $331 million over the next two years.

Tax benefits for certain motorsport racing track facilities, such as Nascar, will cost more than $100 million over the next seven years.

Business property on Indian reservations will receive $660 million in tax breaks over the next three years. Indian employment tax credits will total $119 million over the next four years. Tax breaks for Alaskan Natives receiving trust income will add up to $46 million over 10 years.

More favorable deductions for contributions of food to charities will cost $314 million over two years. For contributions of property, the benefit will be $225 million over a decade.

Film and television production got the last-minute extension of tax write-offs worth $430 million over the next two years.

Businesses in Puerto Rico will receive $358 million over the next two years. In addition, a temporary increase in the excise tax rebate on rum production will give Puerto Rico and the U.S. Virgin Islands $222 million, much of which will go to benefit local rum distillers.

Regulated Investment Companies, such as mutual funds and real estate investment trusts, are to receive $211 million in tax benefits over the next two years. Some of that pertains to dividends paid to foreign investors.

Over the next two years, additional economic development credits for American Samoa will cost $62 million.

Over the next three years, $7 million will go to expand credits for plug-in electric vehicles to include motorcycles. That's a 10% rebate, up to $2,500 for buying an electric scooter.

$59 million in credits for fuel made from algae and expanding benefits for certain other biofuels.

Tax credits for renewable diesel fuel and small agricultural producers of biodiesel will total $2.2 billion over the next five years.

Asparagus growers will get $15 million.

There’s a provision that allows workers to convert conventional 401(k)s into Roth 401(k)s at a cost of $12.2 billion over the coming decade.

There were big breaks for private equity firms and hedge funds, including the

the continuation of the “carried interest” which in effect allows sophisticated investment managers to postpone their earnings from a deal and then often pay taxes at capital gains rates that are lower than the rates for fee income.

And a $9 billion tax break for big banks and manufacturers related to "active financing." Active financing is a special transaction tax break that specifically allows multinational companies to avoid paying US taxes on foreign earnings if those profits resulted from "actively" financing a deal or activity on foreign soil. Not surprisingly, big businesses claim it helps them be more competitive abroad.

Thank you, America.