Tuesday, September 10, 2011 - Infinite Monkey Diplomacy Theorem

Infinite Monkey Diplomacy Theorem

by Sinclair Noe

DOW + 127 = 15,191
SPX + 12 = 1683
NAS + 22 = 3729
10 YR YLD + .06 = 2.96%
OIL – 2.29 = 107.23
GOLD – 23.20 = 1364.30
SILV - .75 = 23.07

The war hasn't started..., yet.

We had an off the cuff comment from Secretary of State John Kerry that set off a new peace plan. Kerry told reporters in London that President Bashar al-Assad of Syria could avert a strike if he turned over his chemical weapons stockpile within a week, adding that such an outcome was unlikely. This is apparently a new diplomatic policy based upon the infinite monkey theorem; which postulates that if you had a roomful of monkeys with typewriters, the monkeys would almost surely, eventually type out the complete works of William Shakespeare.

In this context, the monkey is not an actual monkey but a metaphor for an abstract device or perhaps a Secretary of State, and given enough time to talk he would almost surely, eventually stumble across a peace plan. Last night his apparently off-the-cuff proposal had gained broad support, including a warm welcome from both Syria and Russia, which said it would bring Syria’s chemical weapons under international control. France has introduced a proposal with the UN. Kerry has denied the whole thing, calling the remark nothing more than a rhetorical exercise. Methinks he doth protest too much; for what is politics but a rhetorical exercise?

If you don't like the infinite monkey theorem, then perhaps we are seeing an extremely impressive 3D chess match, and the Grand Masters are trying to pass it off as a game of checkers. Remember that Obama just returned from the G20 meeting in Russia, and there was a private meeting between Obama and Putin. We don't know the details but it is fairly certain the Syrian situation was discussed. We will know more in the richness of time.

Or, more precisely at about 6PM Pacific time. President Obama delivers a State of the Strike Speech from the Oval Office. White House speechwriters have been revising their drafts. Obama is now expected to say that the threat of military action has led to the diplomatic opening, and to urge Congress to keep the pressure on Syria even as his administration examines whether the Russian proposal is serious or a way to obstruct military action. Negotiations are more effective with the threat of cruise missiles. And this leaves fewer excuses for Congress to vote against granted the president authority for military intervention, if Assad were to reneg on the peace proposal. And all this may come to naught; calls for peace so rarely silence the drums of war; but there seems to be a moment here where sanity might prevail.

It has been a blast to watch. On cable news, everything is breaking; breaking news; breaking updates; breaking coverage; breaking developments; huge developments; breaking huge developments.

While all attention is focused on Syria, we almost forgot that this week five years ago there was a meltdown on Wall Street. Lehman Brothers went bankrupt. The biggest banks were so terrifyingly big that they had to be bailed out by the US government in order to survive a financial crisis, lest they obliterate the global financial system. Today, the big banks are even bigger.

The four biggest US banks (JPMorgan Chase, Bank of America, Citigroup and Wells Fargo) today have about $7.8 trillion in assets, or about 47 percent of U.S. gross domestic product, up from $6.4 trillion, or 43 percent of GDP, at the time of the crisis in 2008. The six biggest banks, a group that now includes Goldman Sachs and Morgan Stanley, now have $9.6 trillion in assets, or nearly 58 percent of GDP.

The Dodd-Frank rules designed to stop banks from betting with the insured deposits of ordinary savers are still on the drawing boards, courtesy of the banks' lobbying prowess. The Volcker Rule has yet to see the light of day.

JPMorgan Chase is the biggest of the banksters, and may well be the baddest. Last year it lost $6.2 billion by betting on credit default swaps tied to corporate debt - and then lied about it. Evidence shows the bank paid bribes to get certain counties to buy the swaps. The Justice Department is investigating the bank over improper energy trading. That follows the news that the anti-bribery unit of the Security and Exchange Commission is looking into whether JPMorgan hired the children of Chinese officials to help win business. The bank has also allegedly committed fraud in collecting credit card debt, used false and misleading means of foreclosing on mortgages, and misled credit-card customers in seeking to sell them identity-theft products.

They've set aside $6.8 billion for legal; which sounds like a lot; it is a lot. But for JPMorgan it is just the cost of doing business; they weigh the probability of getting caught; they weigh the probability of being prosecuted; they weigh the cost of fighting regulators; they don't even worry about the possibility of criminal charges; they tally the cost of penalties; and they still have a hefty profit. That's all that matters.

And the guys running the banks five years ago, well they got while the getting was good. Richard Fuld presided over the collapse of Lehman. and sent a tidal wave of panic through the global financial system, Fuld is living comfortably.

He has a mansion in Greenwich, Conn., a 40-plus-acre ranch in Sun Valley, Idaho, as well as a five-bedroom home in Jupiter Island, Fla. He no longer has a place in Manhattan, since he sold his Park Avenue apartment in 2009 for $25.87 million. Other bankers such as Jimmy Cayne (Bear Stearns), Stanley O’Neal (Merrill Lynch), Chuck Prince (Citigroup) and Ken Lewis (Bank of America) are also living in quiet luxury. The five ultra-rich former Wall Street chieftains have simultaneously faded into luxurious obscurity while the survivors — Jamie Dimon of JPMorgan and Lloyd Blankfein of Goldman Sachs — have only consolidated their power.

Last year a federal judge approved a $90 million settlement of a class action suit brought by Lehman investors against Fuld and several other company executives and directors. The judge, Lewis Kaplan, questioned whether the settlement, which will be paid entirely by Lehman’s insurers, was fair given that none of the individuals would pay out of pocket. He agreed to the deal, however, because litigation expenses for a trial were likely to deplete the funds available for compensating the investors. The cost of doing business.

Five years and the situation is more dangerous than ever. The big banks are bigger than ever, more ungovernable than ever; and the economy still hasn't recovered. Now, think about what might happen if we had a repeat of five years ago; or Act II if you prefer. What happens if there is another bank failure and we are again presented with the option of bailing out the banks or watching our 401ks slip away like sand through the hourglass. The big banks are ungovernable - too big to fail, too big to jail, too big to curtail. They should be split up, and their size capped. They should be chopped into small pieces, easily digestible pieces. When a small bank fails, we don't even burp. Chop them up into bite size morsels. There's no need to wait for Congress to do it; the nation's antitrust laws are adequate to the job. There is ample precedent. In 1911 we split up Standard Oil. In 1982 we split up Ma Bell. The Federal Reserve has authority to do it on its own in any event. 

We could do it. Things change. Happens all the time.

Today, the Dow Industrial Average announced a change. In the biggest shake-up of the Dow Jones industrial average in nearly a decade, Goldman Sachs, Visa and Nike will join the 30-stock index, with Bank of America, which just two years ago was the largest US bank by assets, one of the names exiting the Dow. Also leaving the Dow, Hewlett-Packard, and Alcoa. The changes will take effect at the opening of trading September 23.

Bank of America's run in the Dow was not one for the history books. The stock joined the index in February 2008. The stock is down more than 65 percent since it joined the Dow. The company was engulfed by the financial and housing crisis after it acquired sub-prime mortgage originator Countrywide Financial in January 2008. The bank said being removed from the index "has no impact on our business or our strategy for providing solid returns to shareholders." True enough, the moves don't affect the bottom line of the companies. With a market value of about $157 billion, BofA becomes the biggest US company not included in the average, other than Apple and Google