Tuesday, June 03, 2014 - Always Look on the Bright Side

Always Look on the Bright Side
by Sinclair Noe

DOW – 21 = 16,722
SPX – 0.73 = 1924
NAS – 3 = 4234
10 YR YLD + .06 = 2.59%
OIL + .37 = 102.84
GOLD + 1.40 = 1245.90
SILV + .05 = 18.91

Automakers reported strong sales of new cars in May, the strongest annual sales rate since before the 2008 financial crisis. Industry sales rose 11.3%. Chrysler and GM had their best month of May in 7 years. A record number of recalls at GM since the first of the year did not crimp demand for the automaker's new vehicles. Average transaction price for a new vehicle in May was $32,307, according to research firm Kelley Blue Book, which said average new-car prices were up $653 from a year ago, but down slightly from April.

The city council of Seattle Washington has voted to raise the city’s minimum wage to $15 an hour, the highest level of any major US city. Wages would begin to rise next year, ultimately reaching $15 from Washington state's minimum of $9.32 over three to seven years, depending on the business. Under the plan, firms with more than 500 employees nationally will be given at least three years to phase in the increase, those who provide health insurance subsidies would get four years and smaller businesses would be given seven years. US minimum wage is $7.25, although 38 states have set higher levels. The states of California, Connecticut and Maryland have recently passed laws increasing their respective wages to $10 or more in coming years.

Yesterday we heard the EPA proposal to cut power plant carbon emissions by 30% over the next 15 years. Even before the announcement we heard concerns about how that might affect jobs, most of it conjecture. In 2010 when the country was debating a clean energy bill aimed at cutting carbon emissions by 17%, the Congressional Budget Office predicted how destructive the law would be for American jobs. The CBO report concluded it wouldn’t be destructive at all, rather it would probably add more jobs than it killed.

The report found that overall, unemployment would probably increase in the short term. Workers may lose jobs by the thousands across industries that include coal mining, oil and gas extraction and transportation, the report said. And, it added, people who found new jobs by relocating or by learning new skills would probably be earning lower wages than before.

But the CBO report also said that, as polluting industries like coal mining shrink, industries with fewer carbon emissions would expand by as many as a half-million new jobs by 2025. States that are heavily coal-dependent will have to shift to some degree away from coal and to other, new resources; but the electricity has to come from somewhere, so there will be new facilities built to produce it.

In general, the debate about how environmental regulation will affect the economy is so polarized that studies end up with contradictory conclusions. In a 2012 review of more than two dozen such studies, a team of researchers at a New York University think tank found that studies commissioned by big energy companies usually found that regulations increase unemployment, while those by environmental groups found the opposite.

You’ve probably heard about the controversy surrounding the book Capital in the 21^st Century by Thomas Pikkety. A reporter from the Financial Times says some of Pikkety’s statistics are flawed. Pikkety responded by saying his research is solid. Now we have a new source to support Pikkety. According to a new report by stock market strategists at Bank of America Merrill Lynch, the rich are going to keep getting richer all over the world, pretty much just as French economist Thomas Piketty describes in his bestselling book.

And according to the folks at Merrill Lynch, this represents an opportunity for Merrill Lynch. They write: "We are aware of the controversy over Piketty’s math (see the FT Money Supply blog), but are generally comfortable with the thrust of his analysis, having read his 577-pager, looked at his (problematic) spreadsheets, and cross-checked his data with alternative, credible sources. His questionable assumptions do not detract from the power of his thesis."

Merrill pointed out that it has been predicting the rise of "plutonomies -- economies where economic growth is powered by and largely consumed by the wealthy few" -- for the past decade. While this might sound like a nightmare world for some of us, it is also a chance to make a bunch of money, for those mostly rich people with the means to invest in companies that most profit from the wealthy elite. This includes luxury goods makers, money managers and private banks.

Always look on the bright side.

For the past two years, European Central Bank President Mario Draghi has been saying “whatever it takes”, giving the impression the ECB was ready to take on a stimulus program, jawboning the markets with the hint of bold monetary action, right around the corner. Today, a report showed Eurozone inflation at just 0.5% in May. A separate report showed the Eurozone jobless rate at 11.7% in April, ticking down from 11.8% in March, but still more than 25% in Spain and Greece. For 2 years Draghi said “whatever it takes” and for 2 years he has done nothing. On Thursday, the ECB meets to determine monetary policy and Draghi is expected to do something, and it better be something worth the wait.

It is widely anticipated the ECB will cut its target on loans from one-quarter percent to 0.1%, maybe down to a flat zero; and they are expected to eliminate paying banks on their deposits, cutting that into negative territory, essentially charging the banks to park cash at the central bank. And if that’s all the ECB does, it will probably be considered a huge disappointment; cutting rates won’t change borrowing conditions materially for most companies and it won’t be enough to lift the Eurozone out of the deflationary cycle.

It’s time for another edition of banks behaving badly. This is really an ongoing saga but sometimes we turn our gaze away and focus on other important issues; you might think that means the banksters haven’t been misbehaving, but the truth is their transgressions are never-ending.

Last month, Credit Suisse agreed to plead guilty to criminal charges of helping tax cheats avoid paying US taxes. Credit Suisse was fined $2.6 billion, which is a hefty fine but the bank basically got off with punishment fitting a civil suit. Still, it sent a message.

The Treasury Department announced that more than 77,000 foreign banks from 70 countries have agreed to share information about US account holders as part of a crackdown on offshore tax evasion. Participating countries include all the world's financial giants, as well as many places where Americans have traditionally hid assets, including Switzerland, the Cayman Islands and the Bahamas. Under the law, foreign banks that do not agree to share information with the IRS face steep penalties when doing business in the US. The law requires American banks to withhold 30% of certain payments to foreign banks that don't participate in the program. And if the US banks fail to withhold the tax, they would be liable for it themselves.

Next on the list is BNP Paribas; the Justice Department is looking into claims the French bank broke trade sanctions against Sudan, Iran, and Cuba between 2002 and 2009; essentially, international money laundering. BNP Paribas is facing possible criminal charges and possible penalties of $10 billion. In December 2012, HSBC faced similar charges that it breached US sanctions and laws against money laundering; HSBC agreed to pay $1.9 billion in civil penalties.

 Now, US authorities are seeking criminal charges and a stiffer fine, the equivalent of a year’s profit for the French bank. The precise amount of the fines and the conditions attached to them is still a matter of speculation and probably negotiation. The crimes of BNP are probably no more egregious than the wrongdoing of HSBC, but for a long time BNP refused to admit wrongdoing. If you’ve ever watched a cop show on TV, you know how that works; cooperate and the punishment will be more lenient.

President Obama is traveling to France on Thursday to commemorate the 70^th anniversary of D-Day, the landing at Normandy. And while the visit is supposed to be a celebration of the liberation of France by its allies, relations between France and the US are a bit rocky. Many in France are concerned that America lets its own banks off rather lightly and cracks down on foreign banks instead to appease voters’ hatred of the banksters. American rules sometimes differ from European rules, and criminalize behavior that might be legal in the banks’ home country. And two more French banks, Societe Generale and Credit Agricole, are also thought to be in the crosshairs of American authorities for allegedly breaking sanctions and money laundering.

The French are getting nervous. The French foreign minister says the fine against BNP would be unfair and it would hit BNP Paribas' funds and result in fewer loans for French businesses. They claim the US is using its position as the leading global financial market to bully their banks. So on Thursday, Presidents Obama and Hollande will get together for D-Day festivities and dinner and conversation. The banking fines will be a major topic, but there are other acrimonious subjects; France seems determined to continue military hardware sales to Russia, which might not violate the recently imposed sanctions but certainly violates the spirit of the sanctions.

The US has embarked on a new way of fighting, and it involves sanctions and economic weapons; it is certainly preferable to the battles waged 70 years ago in Europe, but it won’t work if the banksters put their greed ahead of other priorities. The French politicians might whine about the hardships, but they need to get their banks in order, and for that matter so does the US.

Thursday, April 11, 2013 - Banks Behaving Badly

Banks Behaving Badly

by Sinclair Noe

DOW + 62 = 14,865
SPX + 5 = 1593
NAS + 2 = 3300
10 YR YLD - .01 = 1.79%
OIL – 1.15 = 93.49
GOLD + 1.70 = 1562.00
SILV + .01 = 27.76

The markets went up today because the market has been moving higher. Nothing in the news to derail the trend. Jobless claims fell far more than expected in the latest week, dropping to the lower end of the range for the year. Retail executives forecast improved same-store sales in April after mixed results in March. Other economic data showed import prices slipped 0.5 percent last month, in line with expectations, while export prices fell 0.4 percent, signaling inflation pressure remained tepid and would allow the Federal Reserve to continue with its current monetary policy. Most of the shorts in the market have been pummeled already; if you're waiting for a pullback, you've probably run out of patience. The trend is up; at least for now.

And we are in earnings season. I'm waiting for the big banks to post results. Right now the banks are generally trading below book. Citigroup trades at about 14 percent less than tangible book value,and Bank of America trades at a 7 percent discount to book value. JPMorgan, the biggest US bank by assets, and Goldman Sachs, the fifth-biggest, trade for 28 percent and 9 percent more than tangible book value, respectively. One of the concerns is that the banks still hold toxic assets on their books, and since counterparties don't know if they can trust those assets, the banks aren't receiving full valuation.

New legislation to impose higher capital rules on the largest banks, such as the proposal from Senators Sherrod Brown and David Vitter could possibly trigger a break-up of the largest lenders; however, it doesn't look like that legislation will go far. But, even if the politicians can't figure out a way to break up the big banks, the market might.

Analysts at Wells Fargo say shareholders should be demanding the big banks get broken down. “Given the challenges posed by increasing regulation, higher capital requirements, and well-publicized trading/market challenges, it’s not surprising that investors remain reluctant to assign a ‘full’ valuation to the universal banks,” the analysts wrote. “If regulators and/or legislators don’t demand it, shareholders could also intensify demands to ‘break up the banks.’ ”

The report says that if the banks are broken up, Citigroup should get a 24 percent premium, JPMorgan should get 69 percent and Goldman Sachs should be valued at 19 percent more than tangible book. Apparently the parts are worth more than the sum of the parts.

Of course, this is working on the idea that the banks won't implode first, due to their own bad behavior. The New York Times reports the big banks have been shedding risky assets to show regulators that they are not as vulnerable as they were during the financial crisis. In some cases, however, the assets don’t actually move — the bank just shifts the risk to another institution.

“This trading sleight of hand has been around Wall Street for a while. But as regulators press for banks to be safer, demand for these maneuvers — known as capital relief trades or regulatory capital trades — has been growing, especially in Europe.”

Apparently the Eurobanks are so large relative to GDP that their governments can’t credibly backstop the banking system so the banks are getting equity booster shots from hedge funds and pension funds:

Rather than selling the assets, potentially at a loss, the banks transfer a slice of the risk associated with the assets, usually loans. The buyers are typically hedge funds, whose investors are often pensions that manage the life savings of schoolteachers and city workers. The buyers agree to cover a percentage of losses on these assets for a fee, sometimes 15 percent a year or more.

The loans then look less worrisome — at least to the bank and its regulator. As a result, the bank does not need to hold as much capital, potentially improving profitability. Apparently, this move satisfies regulators, but it really doesn't change the risk, it just moves it around; it slices and dices the risk; it turns apples into applesauce, but it doesn't eliminate the risk. And if the assets default, then all the derivatives written to protect against risk, will become the most risky assets around. Unraveling these derivatives if there is a default is something like trying to make apples of the applesauce.

We frequently talk about the bad behavior of the big banks, but many of the smaller banks have been misbehaving as well. A government watchdog says that 137 community banks used $2.1 billion from a special fund aimed at boosting lending to small businesses to repay their bailouts from the financial crisis.

A report issued Tuesday by the special inspector general for the Troubled Asset Relief Program says the bailed-out community banks didn't step up their loans to small business nearly as much as other small banks that weren't rescued. Some banks that used the small-business lending fund to repay bailouts didn't increase lending at all, while others increased loans to small business by 25 cents for every $1 from the fund.

Congress created the small-business lending fund in 2010 to encourage banks with less than $10 billion in assets to expand their lending to small businesses. At a time of economic distress, the aim was to help small businesses get capital that had become difficult for them to obtain. The loan program charged the community banks lower interest rates if they used the money for loans to small businesses.

The Treasury Department was authorized to spend up to $30 billion on loans to small banks under the program. Only $4 billion was spent.. Of that, a total $2.7 billion went to the 137 bailed-out banks, which used $2.1 billion of it to repay the higher-interest rescue aid they had received from the government. For some small banks that received bailouts under the Troubled Asset Relief Program, the small-business lending fund "turned out to be little more than a TARP exit strategy," Romero said in a statement.

The law creating the special fund allowed banks to use money from that program to repay their bailouts. By repaying TARP funds, banks were able to escape limits on executive compensation and other restrictions.

We've talked recently about the Office of the Comptroller of the Currency, the OCC, and the Federal Reserve had conducted a review of abusive foreclosure practices by the big banks, and they were starting to send out checks to abused homeowners; a few checks for as much as $125,000, but the vast majority of checks for less than $300. The regulators conducted a case by case review of foreclosure abuses; well, not exactly. The regulators allowed the bank to hire private consultants to conduct the reviews, but it turned out to be too much work, so after a while they just threw up their hands and quit, even though they got paid $2 billion dollars to conduct the reviews. And the regulators just told the banks to pay some money; $3.6 billion to 4.4 million homeowners; without admitting wrongdoing, of course.

So, today, the regulators were on Capitol Hill to explain their actions, which were pretty much inexplicable. Among the inexplicable actions in the foreclosure abuse investigation is why the regulators did not immediately turn over case records of borrowers who maybe considering private legal action against the banks. It almost sounds as if the regulators were obstructing justice; actually, that's exactly what it sounds like – a specific decision to protect the banks but not to help the families who were illegally foreclosed on. 

Friday, December 21, 2012 - If You Are Not a Member of an Organized Political Party, You Just Might Be a Republican

If You Are Not a Member of an Organized Political Party, You Just Might Be a Republican

by Sinclair Noe

DOW – 120 = 13,190
SPX – 13 = 1430

NAS – 29 = 3021
10 YR YLD - .05 = 1.75%
OIL – 1.24 = 88.89
GOLD + 9.80 = 1658.00
SILV + .04 = 30.06

The world as we know it did not end today. This means that I have a lot of Christmas shopping to complete in a very short period of time.

Last minute might working for shopping but it's no way to run a country.

Let's take a look at Plan B, excuse me, I think we've now moved on to Plan C. Will Rogers once said: “I'm not a member of any organized political party, I'm a Democrat.” Well, times change and now the unorganized party is the GOP. Consider: last week, Mitch McConnell tried to filibuster his own bill; this week John Boehner couldn't line up enough votes for a vote on Plan B, let alone Plan A.

Plan B was really a brilliant piece of legislation; it was sold as a tax cut for everybody with incomes under $1 million, except it actually raised taxes on everybody except the income earners between $200,000 and $1 million; everybody else would have been staring down a tax increase; low income earners and high income earners alike.

There were some other little dirty secrets in Plan B. House Republicans want to cut wasteful spending, so Plan B offered to eliminate the Office of Financial Research. Why that obscure little office? Because that’s where the Dodd-Frank Wall Street Reform & Consumer Protection Act provided for the breakup of too-big-to-fail banks that actually fail by means of an Orderly Liquidation Authority. Why would they want to axe that? Better question is how much did the big banks pay the politicians to try to kill that.

Maybe they think it would be impossible for the too big to fail banks to actually fail. No. The Office of the Comptroller of the Currency just had a closed-door “convention” to talk with bank directors about how safe the banks really are. Nineteen of the country’s biggest banks were looked at; they all failed.

Another big plan to cut spending contained in Plan B was to cut funding for the newly formed Consumer Financial Protection Bureau. The CFPB actually gets its funding from the Federal Reserve's Operating Expense Budget, not directly through Congress, so this was just a bald-faced attempt to kill the the CFPB because consumers don't need protection from the banksters, or because some politicians needed to boost their campaign coffers.

So, Speaker Boehner trotted out Plan B for a vote. Paul Ryan supported it; Eric Cantor supported it; Grover Norquist gave it his blessing, saying it wasn't really a tax increase. And even with the GOP stars of the House lining up in support, Boehner couldn't rally enough support to justify a vote.

Meanwhile, the guy sitting across from the negotiating table just won the Time Magazine Person of the Year Award. I'm guessing he'll put the award up on the shelf next to his Nobel Peace Prize. In case you have felt comfortable with reality, this is the new reality; and in this new reality, John Boehner now has lost his bargaining chips. He has shown he is unable to deliver votes in the House. Why would you even negotiate with someone who can’t deliver on a promise?

The two man game between Boehner and Obama is finished for now. Look for a shift to the Senate to make a deal with the White House. If that gets done, then the House will be left with nowhere to hide; meaning that if the House then fails, they will get the blame. Boehner had a horribly designed Plan and then he executed it in the worst possible manner, and after a quick Christmas recess he's going to come back and have a compromise plan that is likely to splinter the House Republicans even more.

And eventually a deal will get done, because taxpayers are getting fed up with this dysfunction, and because big business wants a deal. Which changes the old Will Rogers quote to a Jeff Foxworthy punchline; if you are not a member of an organized political party, you just might be a Republican.

NRA executive vice president Wayne LaPierre addressed the Sandy Hook shootings today for the first time since the massacre, and called for universal disarmament and a total ban on the sale of assault weapons. Just kidding.

LaPierre blamed video games and the media for the violence, because guns don't kill people, movies do. And the whole thing might have been avoided if we had armed police and armed teachers in every classroom.

In 1998, the SEC announced “Reg. ATS,” which authorized electronic communication networks to be used between traders to make deals outside exchanges. In 2001, the SEC made another big move, requiring stock prices to be quoted in decimals rather than fractions. This changed the minimum difference between stock prices from 1/16th of a dollar to 1/100th, preventing exchanges from making extra money on the spread between the price at which they sell a stock and the price at which they buy stocks. Then in 2005, the regulator implemented a set of rules collectively known as “Reg. NMS,” which, among other things, required brokers to route trades to the venue that offers the very best price; this regulation further squeezed the margins that the traditional exchanges and crated more competition among exchanges and upstart trading platforms.

Then, the rapid development of computer technology allowed upstart firms to set up their own trading platforms, and the new trading platforms attracted the high frequency traders using powerful computers located right next to the exchanges in order to cut down transmission times, allowing the high frequency traders to use algorithms to front-run consumer trades and scalp a fraction of a decimal from each trade.

So, the old, traditional stock exchanges don't make much money anymore, and that raises the question; why did a small Atlanta-based commodity and derivatives exchange called Intercontinental Exchange, or ICE, purchase the NYSE Euronext for $8.2 billion?

It's not for the stock exchange; it is for the derivatives exchange that the NYSE owned and operated out of London, called Liffe (pronounced LIFE), which stands for the London Interantional Futures and Options Exchange. There are relatively few derivatives exchanges, they tend not to compete directly with each other, they tend not to compete on price, and they’re extremely profitable. What do they do to make all this profit? They trade derivatives, which are not really equity positions or not really debt positions but more like a form of risk insurance, without claims paying reserves. This means the derivatives actually increase risk because of the false sense of security offered by having insurance, even if all the traders know the insurance is likely unable to pay off in the event of a problem, which just encourages far more risk than if someone actually had skin in the game.

But never-mind that that massive moral hazard. The derivatives can be traded, in a largely unregulated environment and that means big bucks for the traders. It also means systemic risk for the global economy, and that is why ICE bought the NYSE. How does this help the economy? How does this help finance companies to grow and employ people? Well, it doesn't. That's just old school thinking. As far as the iconic, historic trading floor of the New York Stock Exchange, well, it's nothing more than a tourist attraction.

Now, let's take a look at Banks Behaving Badly: The Year in Review. With thanks to : (Reuters)

Bank of America: the US Justice Department is seeking $1 billion in fines for troubled loans sold to Fannie and Freddie; MBIA’s lawsuit against Countrywide, which was disastrously acquired by BofA, rolls on; BofA is one of five banks participating in the $25 billion national mortgage settlement.

Bank of China: the families of Israeli students killed in a 2008 terrorist attack are suing the BOC for $1 billion “intentionally and recklessly” handling money for terrorist groups.

Bank of New York Mellon: a subsidiary paid $210 million to settle claims it advised clients to invest in Bernie Madoff’s ponzi scheme; the DOJ continues to investigate possible overcharges for currency trades that it says generated $1.5 billion in revenue.

Barclays: $450 million settlement in the Libor scandal; also fined by the FSA for mis-soldinterest rate hedges.

BBVA: settled overdraft suit for $11.5 million.

Citigroup: settled CDO lawsuit for $590 million; one of five banks participating in the $25 billionnational mortgage settlement; paid $158 million to settle charges it “defaulted the government into insuring” risky mortgages.

Credit Suisse: sued by NY state for allegedly deceiving investor in the sale of MBS.

Deutsche Bank: settled a DOJ mortgage suit for $202 million; FHFA fraud case is ongoing.

Goldman Sachs: FHFA fraud case is ongoing; after a ruling by federal appeals court, a class action lawsuit over MBS will go forward.

Crédit Agricole: sued by CDO investors two times.

HSBC: settled money laundering charges for $1.9 billion; set aside $1 billion for future settlements related to mis-selling loan insurance and interest rate hedges in the UK; Libor settlement still to be reached.

ING: settled charges that it violated sanctions against Iran, Cuba, etc. for $619 million.

JP Morgan Chase: being sued by NY state for MBS issued by Bear Stearns; class action lawsuit and criminal probe over failed derivatives trades in its Chief Investment Office; one of five banks participating in the $25 billion national mortgage settlement. And then there was this notice in the Murdoch Street Journal today: The Office of the Comptroller of the Currency, led by Comptroller Thomas Curry, is preparing to take a formal action demanding that J.P. Morgan remedy the lapses in risk controls that allowed a small group of London-based traders to rack up losses of more than $6 billion this year, according to people familiar with the company’s discussions with regulators. The OCC, the primary regulator for J.P. Morgan’s deposit-taking bank, isn’t expected to levy a fine, at least initially.

Mitsubishi UFJ: paid an $8.6 million fine for violating US sanctions on Iran, Sudan, Myanmar and Cuba.

Morgan Stanley: fined $5 million for improper investment banking influence over research during Facebook’s IPO.

Royal Bank of Scotland: $5.37 billion shareholder lawsuit related to 2008 rights issuance; set aside $650 million to cover claims it mis-sold payment protection products; also fined by the FSA for mis-sold interest rate hedges.

Santander: fined by the FSA for mis-sold interest rate hedges.

Société Générale: rogue trader Jerome Kerviel loses appeal his appeal 3-year sentence for trades that generated $6.5 billion in losses.

Standard Chartered: $340 million fine paid to NY state department of financial services for allegedly hiding the identity of customers in transactions with Iran and drug cartels; $327 millionpaid to the Federal Reserve and US Treasury’s anti-money laundering unit.

State Street: fined $5 million for lack of CDO disclosure.

UBS: $1.5 billion Libor fine and two traders criminally charged; rogue trader responsible for $2.3 billion loss found guilty of false accounting. The fine for Libor? Anything under $2 billion is considered a victory for UBS, or as they say at UBS, “half a Adoboli”.

Wells Fargo: Federal lawsuit over mortgage foreclosure practices ongoing; paid $175 millionover mortgage bias claims; one of five banks participating in the $25 billion national mortgage settlement.