Tuesday, September 18, 2012 - Maybe We'll Just Keep Plugging Along

Maybe We'll Just Keep Plugging Along

-by Sinclair Noe

DOW + 11 = 13,564
SPX – 1 = 1459
NAS -0.87 = 3177
10 YR YLD -.03 = 1.81%
OIL +.24 = 95.53
GOLD + 8.60 = 1772.10
SILV + .53 = 34.88
PLAT – 38.00 = 1635.00

FedEx lowered its outlook for global growth and industrial production when it reported fiscal first-quarter earnings. That has negative implications for energy demand. The world's No. 2 package delivery company forecast a continued slowdown in global trade.

Yesterday, we told you about the little flash crash in oil. The price of a barrel of oil dropped $3 in about one minute for no apparent reason. There were rumors of an announced or leaked SPR release decision, then there were rumors of an algorithmic trade gone bad. The timing was suspect; the equity and other markets have rallied due to all of the announced and expected easing measures from the Fed and the ECB; the belief is that consumption and economic growth will necessarily follow due to extremely low interest rates and the positive effect of inflation on asset values. And commodity prices, including oil, moved higher after QE 1&2. So, it was strange to see prices just drop for no apparent reason; they seemed to collapse of their own weight. Maybe the outlook for the economy is more dire than we think. Maybe demand for oil is far less than projected. Maybe the Fed has done all they can and they've run out of firepower. Maybe the odd price behavior could happen in the equity market.

Maybe the Federal Reserve's decision to buy mortgage backed securities until the cows come home or the unemployment rate is no longer a scandal, maybe that should drive down mortgage rates. Supply, demand and all that good stuff. Right now, borrowers are paying around 3.55 percent for a 30-year fixed rate mortgage that qualifies for a government guarantee of repayment. That’s down from 4.1 percent a year ago, and 5.06 percent three years ago.

Mortgage rates have declined as the Fed bought trillions of dollars of bonds, a policy that aims to stimulate the economy. The question is whether we should be looking at lower mortgage rates based upon hundreds of billions of purchases of MBS by the Fed. Don't count on it. Prices look like they're stuck. Banks make mortgages, but since the 2008 crisis, they have sold most of them into the bond market, attaching a government guarantee of repayment in the process. Let's examine; the metric effectively encapsulates the size of the gain that banks make on those sales.

In September 2011, banks were making mortgages with an interest rate of 4.1 percent. They were then selling those mortgages into the market in bonds that were trading with an interest rate, or yield, of 3.36 percent. the difference between the bond and mortgage rates; in this case it was 0.74 percentage points. The bigger the “spread,” the bigger the financial gain for the banks selling the mortgages. That 0.74 percentage point “spread” was close to the 0.77 percentage point average since the end of 2007. Banks were taking roughly the same cut on the sales as they were in previous years.

But something strange has happened over the last 12 months. That spread has widened significantly, and is now more than 1.4 percentage points. The cause: bond yields have fallen a lot more than the mortgage rates banks are charging borrowers.

Put another way, the banks aren’t fully passing on the low rates in the bond market to borrowers. Instead, they are taking bigger gains, and increasing the size of their cut. Why? Because they can.

So where might mortgage rates be if the old spread were maintained? At 2.83 percent – that’s the current bond yield plus the 0.75 percentage point spread that existed a year ago.

This summer, the British bank Barclays settled charges that it had manipulated a key global interest rate, the Libor, which is used as a baseline in as much as $500 trillion of transactions. Another British Bank, Standard Chartered, agreed to settle charges of money laundering with Iran; those charges were brought by the New York Department of Financial Services after the bank voluntarily informed regulators that it was reviewing relevant practices. In the spring, JPMorgan surprised shareholders with an unexpected trading loss at its proprietary trading unit in London; $2 billion, nope make that 3, I mean 4, let's just call it $6 billion down the drain. As “the London Whale” proved, any good trader at the biggest banks can lose more money in a few hours than Washington will demand in fines for fraud that screwed the globe out of trillions of dollars of wealth and tens of millions of jobs.

A new report from the New York Times shows regulators are investigating whether several US banks allowed criminals to launder money. The Office of the Comptroller of the Currency is leading the money-laundering investigation. The OCC could soon take action against JPMorgan Chase, and it is also investigating Bank of America. If the OCC takes action, it could be similar to a cease-and-desist order that it filed against Citigroup in April; a cease and desist is just a slap on the wrist and please don't misbehave in the future. The OCC said that Citi had deficient internal controls and anti-money laundering procedures and they ordered the bank to tighten up its rules and comply with the Bank Secrecy Act and related regulations. Citi had already told the regulator that from 2006 to 2010, it had "failed to adequately monitor" some of its transactions connected to "foreign correspondent banking."

Last year, JPMorgan paid $88 million to settle charges from the Treasury that it had unlawfully processed money for Cuba, Iran, Sudan and Liberia. At the time, JPMorgan said it had had no intent to violate regulations. There now appears to be a strong possibility that JPMorgan has done it again. Oops. It's not expected that the investigations will determine the banks were trying to support countries like Cuba or Iran; it was just faulty oversight that allowed bad guys to make unlawful transactions. After all, the banks had a chance to pick up some easy fees, and all they had to do was look the other way. And then the bad guys took the money they had laundered through the banks and used the money to buy explosives to blow the legs off an American soldier. And when the bad guys sold drugs and laundered the money through the banks, the bankers maintained that such violations are almost always unintentional. Oops.

Now, we could have a good debate about criminalization or legalization of drugs; we could talk about the justifications for economic sanctions against Iran or the embargo against Cuba, but that is the law. The Too Big To Fail banks are nothing but giant criminal enterprises on multiple levels. They need to be broken up. They need to be criminally prosecuted. Since Wall Street banks are now "people" with full rights of any other "person" thanks to Citizens United we can expect that they go to jail. Right? Don't hold your breath. I understand that won't happen. I also understand that you don't hear much about these things from the mainstream media. And so I keep plugging away.

So, there was this great headline in the Times: Scandal Poses a Riddle: Will This Nation Ever Be Able to Tackle Corruption?
A brazen brand of crony capitalism has created huge fortunes for a few, at the expense of the nation as a whole

Actually the headline was referring to India, not the king of crony capitalism, the USA. So far as corruption at the top goes, India is a piker. You can't read a newspaper or serious blog without finding yet another example of US crony capitalism, aided and abetted by Washington. Washington remains steadfast in its refusal to do anything about Wall Street’s crimes. It’s a poster child for crony capitalism. It’s as if we fined a bank robber ten bucks for stealing a thousand, then sent him on his merry way to hold up more banks. Our nation’s top cops freely admit that they have no interest in prosecuting criminal behavior perpetrated by our elite 1% at the top of our crony capitalism pyramid.

Meanwhile, the New York City Police, yes the same fine organization that accepted a $4 million dollar donation from JPMorgan last year, the boy in blue arrested 185 oversized soda drinkers, excuse me they arrested 185 protesters. A tip of the hat to the NYPD for keeping the riffraff off the streets.

Now if they could just do something about the rats in the office buildings.