Thursday, March 07, 2013 - Banks Rule the Law

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Banks Rule the Law

by Sinclair Noe

DOW + 33 = 14,329
SPX + 2 = 1544

NAS + 9 = 3232
10 YR YLD + .05 = 1.99%
OIL + 1.09 = 91.52
GOLD – 5.90 = 1579.60
SILV - .16 = 28.98

Another day, another record high close. It seems blasé, these little record high celebrations; and the more we see it the more mundane, but you'll miss it when it's gone. When will it be gone?

I'll let the market tell us. Right now the market is telling us that it is hitting record highs. Is there a disconnect between the market and the economy? Yes, there is. We have seen improvements in the economy, and we have some economic reports to cover in just a moment, but this is not a great, robust economy. So, can we expect a bubble in the market? Not necessarily. It's certainly possible, but as of today, there is not a bubble. Check tomorrow.

It is possible to have a less than perfect economy and to have record highs in the stock market; in fact, it's not uncommon: 1929, 1937, 1946, 1966, 1982; market highs, rough economic times. At some point you might expect the markets to reflect the economy, meaning you might expect a bubble; maybe tomorrow, maybe three years, or maybe longer. The markets can remain irrational, exuberantly so, for much longer than you can remain solvent.

Are there reasons to be sour on the economy? Sure. Are there reasons to be sour on the markets? Sure, but just be aware that the market has hit a high. Should you jump in? You'll remember that I told you, for less-active investors, that the easiest way to play the market was to follow the Best Six Month, Worst Six Month Strategy. In which case, you are in. You're welcome.

And if you feel battle scarred from Wall Street chopping your financial legs out from under you, and if you have vowed to not let it happen again, then don't. There is no rule that says you have to invest in stocks or bonds. I'm not saying you should bury your cash in a coffee can in the back yard. I am saying that it's O.K. To think outside the box.

Now, over to economic news.

The number of Americans who applied last week for new unemployment benefits fell 7,000 to a seasonally-adjusted 340,000 in the latest week. It's the lowest level in a month and a half and hovered just above a five-year low, offering another sign that the outlook for hiring is on the upswing, or more precisely it was on an upswing. The sequester will start to effect the labor market soon, but not yet. Tomorrow we'll dig into the monthly jobs report for February.

The numbers for fourth quarter productivity were revised slightly lower, to a 1.9% annual rate from 2.0% in its preliminary tally. The output of goods and services and the amount of time workers put in on the job were both somewhat higher compared to the earlier estimate. In the short term, declining productivity can be a signal that companies need to hire more workers to keep up with rising demand while maintaining strong profit margins. Hourly pay for American workers rose 2.6% in the fourth quarter, but adjusted for inflation, earnings only increased 0.4%. What’s worse, inflation-adjusted hourly wages fell 0.6% for the full year, following a revised 0.6% decline in 2011.

You may recall the trade gap narrowed in December as oil prices dropped. You may also remember that all through January and February, you were getting a case of sticker shock whenever you went to the gas station. Today, the Commerce Department reports the trade deficit widened by $6.3 billion in January to $44.4 billion. Excluding petroleum, the trade deficit was unchanged.

So, with all the talk about the sequester and the continuing resolution, which was continued and will not result in a government shutdown, and record highs and Italian elections, yada, yada, yada. You may have forgotten that banksters behave badly. That's where I come in, to tell you more banking news that should twist your intestines.

Attorney General Eric Holder, the top law enforcement official, the nation's top cop appeared before the Senate Judiciary Committee and admitted the most self-evident truth: the big banks are too big to jail.

Holder was responding to questions from Republican Senator Chuck Grassley about why the Justice Department brought no criminal charges against the large British bank HSBC after it admitted laundering money for parties in Iran, Libya and Mexican drug lords. Holder said:

"I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy," he said. "And I think that is a function of the fact that some of these institutions have become too large."

Holder acknowledged that the sheer size of the big banks "has an inhibiting impact on our ability to bring resolutions that I think would be more appropriate.  That is something you (members of Congress) all need to consider."

Grassley and Sen. Sherrod Brown, an Ohio Democrat, have been pushing the Justice Department on the issue and have asked for the names of the outside “experts” officials say advised them that it would threaten financial stability to prosecute big banks. It's no secret.

Allowing the big banks to operate above the law is at one with the philosophy that guided both the Bush and the Obama administrations during the financial collapse. Tim Geithner, former head of the New York Federal Reserve bank under Bush and Treasury Secretary under Obama, gave the advise to protect the banks. In what has become known as the “Geithner doctrine,” documented by numerous eyewitnesses to the administration’s deliberations on the financial crisis, the former Treasury chief consistently advocated preservation of the banks as the paramount objective in any measure. Geithner said that it was necessary to "foam the runway" to protect the banks from total crackup.  That "foam" included literally trillions in the backdoor bailout of banks organized by the Federal Reserve, abandoning the underwater homeowners who were victimized by Wall Street's predatory practices and reckless gambling.

Foaming the runway essentially neutered regulators who weren't already bought and paid for. Holder claimed that the Justice Department has been “appropriately aggressive” in pursuing fraud at the banks, which is an absolute joke. And then contradicted himself when he conceded that levying a fine that is a small percentage of profit is far less effective in scaring bank executives into obeying the law than putting some individuals in jail. Holder said:  “The greatest deterrent effect is to prosecute the individuals in the corporations that are responsible for those decisions.”

At a hearing last week, Warren took Federal Reserve Chairman Ben Bernanke to task for the “subsidy” reaped by the big banks from the perception that they are too big to fail, which a study by Bloomberg evaluated at $83 billion.

Bernanke countered that any benefit was a result of market perceptions, but he became less convincing as he argued that the perception was inaccurate because the Fed would not bail out the banks again.

Holder tried to place the blame at the feet of Congress, and Congress needs to stop stuffing their pockets for a few moments to take action. Bankers spend tens of millions lobbying to weaken regulations and starve regulators of authority and resources.  But when the action gets hot, the bubble starts to build, the music keeps playing, they can trample the laws, mislead the regulators and defraud their customers, bolstered by the confidence that the laws will not apply to them. 

The banksters know their losses are covered, while they pocket their winnings.  They have multi-million dollar personal incentives to leverage up, use other people's money to make big bets on high risk operations that offer big rewards.  Their excesses blew up the economy, but they got bailed out and emerged bigger and more concentrated than ever. And, of course, since investors know the big banks can't fail, the big banks can attract money at much lower rates than smaller banks, a subsidy worth about $83 billion a year according to recent calculations by Bloomberg News.

So, banks operate above the law. Holder's argument is indefensible. There is no reason a bank can't survive the indictment of a CEO or CFO. And if the bank did fall, so be it. It's not the end of the world. The far greater fear than a bank failure is a country that abandons the rule of law.