Tuesday, December 11, 2012 - If Banks Could Kill They Probably Will

If Banks Could Kill They Probably Will

by Sinclair Noe

DOW + 78 = 13,248
SPX + 9 = 1427
NAS + 35 = 3022
10YR YLD +.03 = 1.65%
OIL +.09 = 85.65
GOLD – 2.20 = 1711.40
SILV - .27 = 33.10

If all goes according to plan, in about 13 days, a star will rise in the east somewhere over Washington DC, signaling the birth of a new budget deal. If you're waiting for three wise men, don't hold your breath, because they couldn't find them in our nation's capitol. With just days to go before the nation slides down the fiscal Cliff Clavin of tax increases and spending cuts mandated by our confederacy of dunces to take effect with the passing of the arbitrary date on a calendar, there are signs that a deal to avoid the slide is near.

Pert' near every reporter in Washington says a deal is imminent. Just this Sunday, Obama and Boehner met in secret, well, not exactly a secret, and they did something, maybe they came up with a deal, maybe they barbequed some brats and watched some football, but their silence on the subject speaks volumes. Their silence almost provides proof positive that a bipartisan deal must be something that might have possibly been a part of the silent conversation, or not; but hey, it looks like a deal, except for all those pesky details. And it only took two years, possibly, of unnecessary uncertainty and sovereign debt downgrades to hammer out an agreement to whup the economy upside the head with a two by four without totally destroying it, rather than figuring out a way to grow the economy. Hallelujah, we have something that might be close to a deal, but nobody is saying anything.

Meanwhile, the Fed is meeting to consider monetary policy; and you never know what those wild and crazy guys will come up with. Meanwhile, the Treasury Department is dusting off its book of magic monetary incantations which includes “extraordinary measures” in the event the politicians do a lemming imitation and run off the cliff, and fail to come to a consensus on the debt ceiling, which means paying the bill for money already spent. The extraordinary measures would allow the Treasury to continue to send out checks for things like Social Security, military salaries and other payments. The U.S. was about $67 billion under the $16.394 trillion debt ceiling as of Friday. That’s small change in a world of trillion-dollar deficits and billions in monthly borrowing.

Treasury expects to bump up against the cap, which is set by Congress, very near the end of this month. Lawmakers may not raise it before then — the debt limit has become entangled in fiscal cliff talks. The White House wants to be able to raise the debt ceiling without political drama, though Republicans see their authority over the cap as a crucial bargaining chip. So, the Treasury could play with the numbers and some bonds and keep the government open for a few weeks. After that, who knows? Maybe the government will have to force PBS to fire Big Bird. Maybe the government could shorten the workweek for the Coast Guard; you know, an unpaid furlough. Maybe, they could raise the cost of a fishing license to $50,000. I know some people who would pay. Maybe they could get a loan from a big insurance company.

The Treasury Department says it plans to sell its last remaining shares in AIG, the insurance giant that would have toppled in 2008 without a federal takeover. Washington essentially nationalized AIG in a fit of financial panic, out of fear that AIG's collapse would have taken much of the financial system with it. Instead, the government committed $182 billion to AIG, making it the largest bailout of any single company. The General Motors bailout, at about $52 billion, cost less than one-third what the feds provided to AIG. Treasury expects the government to earn a net profit of $22.7 billion on the AIG bailout, once it sells its remaining shares. That amounts to roughly a 3 percent annual return

The ugliest part of the AIG bailout was the discovery in 2009 that $62 billion in taxpayer funds disbursed to AIG ultimately went to big banks that had contracts with AIG, including Goldman Sachs, Merrill Lynch, Bank of America and even a few foreign firms. They paid off AIG trading partners at 100 cents on the dollar, when those same partners would have gotten a fraction of that amount if AIG had declared bankruptcy. This is when we learned the great untold secret about AIG; it isn't really an insurance company; no self-respecting insurance company would ever pay 100 cents on the dollar for any claims. Instead, we learned that AIG was just a conduit to funnel taxpayer money from Washington to Wall Street.

But, hey, the deal was done, and now the Treasury can sell a few more shares and turn a profit. All's well that ends well.

Not exactly.

Nearly one-third of the AIG stock that the Treasury is selling came from the Federal Reserve, not from the Treasury's bailout program. Plus, there was a little side deal that was a part of the bailout that gives AIG a waiver on billions in future tax payments. I'm not saying I wanted to see AIG destroyed, but it was painful to see the bailout and then the lavish bonuses, and to never see anybody from AIG go to jail for anything. We shoulda had at least one perp walk for our money. But, a global financial meltdown was averted and it won't happen again..., because, umm...., because maybe we'll get lucky next time?

Right now, the Federal Reserve is regulating AIG because AIG owns a small bank, but AIG is planning to sell the bank, and when that is done there will be no government regulator of AIG's non-insurance financial activities, which was the problem that almost destroyed AIG. There may be one option; if the Fed declares AIG to be a systemically important financial institution, then they would continue to be regulated, presumably.

Of course, systemically important financial institution is just another way of saying too big to fail, which is another way of saying too big to jail. Case in point; HSBC. The Treasury Department notes that HSBC allowed “hundreds of millions of dollars” from Mexican drug trafficking organizations to flow though accounts in the U.S” even though the bank had “substantial resources” to limit money-laundering risks.

Specifically, $881 million in drug trafficking proceeds by the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Columbia were laundered through HSBC’s U.S. unit without being detected by the bank. The British banking giant had to pay a $1.9 billion dollar fine for money laundering with Iranians, Mexican drug cartels and such; it sounds like a lot of money, but it's really like a traffic ticket for you or me.

Today, the NY Times quotes anonymous government officials who say they were skittish about indicting HSBC because formal charges would amount to a "death penalty" for the bank, potentially roiling the financial system. Which reminds me of a quaint old saying: “With liberty and justice for all,” or maybe it was “equal protection under the law,” or some such nonsense because if you are a big bank, the law does not apply.

Not a single HSBC individual faces criminal prosecution. Nor have any individuals been charged at the five other big European banks that have also managed to dodge formal money-laundering charges in recent years, including British bank Standard Chartered, which entered its own deferred prosecution agreement on Monday. Apparently, all of this constant money laundering was done by robots.

The message is clear, if you are going to launder money to terrorists and drug cartels, do it under the protective umbrella of a large bank, because apparently the government is afraid of the big bad banks. And that means that if you are a bank and you're big enough, you're basically going to get away with creating and selling toxic securities while also betting against them and trigger a global depression without having to worry about doing any jail time. If you are part of a big bank you can get away with everything short of murder. Bankers can't actually murder people, all they can do is launder dirty money for terrorists and drug cartels which do the actual murdering. It's a technicality, but it is worth noting.

Meanwhile, Italy is still Italy. Over the weekend, Italian Prime Minister-slash-technocrat-slash-commisar, decided to resign. There was great wringing of hands and gnashing of teeth; how could Italy survive? Worse still, would former Italian Prime Minister Silvio Berlusconi rise up from his bunga bunga bed to make a run at the post? Would Monti's resignation usher in an era of instability in Europe's third largest economy? Which is a little crazy considering the unemployment, and protests, and riots, and instability throughout much of Euro-land, including Italy.

New figures out this week showed Italy’s gross domestic product down 2.4% from the year-ago period — the fifth quarterly decline in a row; and industrial production off 1.1% in October from the previous month, the 14th consecutive monthly decline. Under Monti, unemployment in Italy has risen to more than 11% and youth unemployment tops 36%, with countless more young Italians leaving the country for better opportunities elsewhere.

The austerity policies, designed to reduce the deficit by raising taxes and reducing government spending, are having trouble reaching their deficit targets because the GDP keeps falling, and so the debt to GDP ratio grows, even as spending is cut to the bone. Italy’s debt-to-GDP ratio has swollen to an estimated 126% this year. So, most of the politicians that are thinking about running for Prime Minister have pretty much fallen in line with the Euro-powers-that-be in Brussels. And Italian voters who have lived with an unelected government for the past year will soon have a choice of pre-approved candidates. Let's hope they choose wisely.

According to the Public Company Accounting Oversight Board, the nation's top accounting regulator, accounting firms have a problem with actual accounting. The PCAOB report released yesterday "said the eight biggest accounting firms failed in 22% of the audits it reviewed last year to gather enough evidence to support opinions issued by the firms that claimed a company's internal controls were effective."

Actually, that explains a lot.