Friday, July 20, 2012 - Why Hasn't Anything Been Fixed on Wall Street?

Why Hasn't Anything Been Fixed on Wall Street?  
-Sinclair Noe


DOW – 120 = 12,822
SPX – 13 = 1362
NAS – 40 = 2925
10 YR YLD -.05 = 1.46%
OIL – 1.14 = 91.83
GOLD + 2.30 = 1585.00
SILV +.05 = 27.43
PLAT – 3.00= 1421.00


For quite some time it has been accepted that Greece was toast; the Greeks would be forced to swallow the bitter pill of austerity; somehow the Euro-union would survive. And the EU seemed to be dealing with the meltdown of Ireland and Portugal as well; they just forced them to pay for their own bailouts; that plan isn't working out so well with Spain. The Kingdom of Spain was supposed to be the firewall where the breakdown of the Euro-union stopped; that plan isn't working our so well. The problem today is Valencia, a region of Spain, not the orange; they are asking for a $22 billion dollar bailout; apparently in addition to the $123 billion dollar assistance package that is going to bailout Spanish banks and backed by the Spanish citizens, at least theoretically. May be good for the banks but the Spanish economy is still in a downturn and the government says it will step up austerity measures.


Spain's IBEX stock index fell 5.8 percent, its biggest one-day drop in two years, and the risk premium on government debt hit a euro-era high as its borrowing costs rose to 7.32 percent. That yield is above the 7 percent threshold considered unsustainable, with little relief in sight. And that is about 615 basis points higher than the German Bunds. Spain's 2 year bond yield is up 132 basis points from last week.


There is very little to stop Spanish bond yields moving higher at the moment. The euro fell as low as $1.21, its weakest level against the dollar since mid-June 2010, and the euro hit record lows against the Australian, Canadian and New Zealand currencies; and the lowest level against the yen in 11 years. The euro is looking like a slow motion train wreck, and there doesn't seem to be much to stop it. Every now and then we look away, but when we look back, it's just scary and the markets get shaken out of their complacency for a day or so. 


Treasury Secretary Tim Geithner recently described the Euro-situation, saying: “What is very important is that (Eurozone officials) not leave the Continent hanging on the edge of the abyss as a device for getting more leverage for reform, because that leaves the rest of the world much more exposed to financial pressure and slower growth from Europe.”


First, it is a little strange to hear Geithner admit that Europe is on the edge of the abyss; strange because it's true.  Germany would seem to be the most likely country in the EU to provide assistance but they don't seem to be willing to ride to the rescue; they cannot or will not prevent that disastrous scenario, either for economic or legal reasons.  Germany’s constitutional court delayed its ruling to approve German ratification of the ESM, the bailout fund and fiscal compact. So, yes they are on the edge of the abyss. The final decision on the ESM and fiscal compact may not be made for several months. The Germans are opposed to bailouts, or Euro-bonds, or Euro-wide deposit insurance. Meanwhile, the bond sharks are circling around Spain and they smell blood. 


The ECB and the EU may do something to kick the can down the road and usually the central bankers have been able to postpone and extend far longer than you might imagine. The news from Europe continues to be a smoldering mess, and it could be a long convoluted process before things are resolved there, or the economy could fall over the edge on any given day. 


Earlier this week, Geithner forcefully defended the New York Fed's actions after it was made aware of Libor irregularities. Geithner said: “We did the right and necessary thing and we did it early.”


Maybe not. The Bank of England Says New York Fed Gave No Warning on Rate-Rigging. The call for a review into Libor in 2008 came after Mervyn King, the Head of the Bank of England and Mr. Geithner, then the head of the Federal Reserve Bank of New York, had talked about potential problems with the rate during a meeting in Basel, Switzerland, in early May 2008. This discussion was followed by a flurry of e-mails a month later in which Mr. Geithner, who is now the Treasury secretary, recommended changes to the rate, which is used as a benchmark for more than $360 trillion financial products worldwide. The suggestions included ‘‘strengthen governance and establish a credible reporting procedure’’ and ‘‘eliminate incentive to misreport,’’ according to documents released by the New York Fed. Mr. King told Mr. Geithner that he supported the suggestions. Yet, according to documents released today,  the New York Fed did not make any allegations of wrongful behavior connected to Libor. Mr. King told a British parliamentary committee on Tuesday that Mr. Geithner’s suggestions did not represent a warning about the potential manipulation of Libor.


Sheila Bair, the former head of the FDIC, said, "Looking at those emails, it looks like they had pretty explicit notification of some very bad behavior, and I don't understand why they didn't investigate." 


Bair said the Libor scandal exemplifies the reckless risk-taking culture on Wall Street, something she said remains despite the Dodd-Frank banking reforms. "There's still a lot of challenges on the horizon, especially on the trading desks of these large financial institutions," Bair said. "It doesn't appear that reform has really taken hold. The culture still seems to be one of excess risk-taking, perhaps ignoring the law if that means they can fatten their year-end bonuses." So, the very basic question is – why hasn't anything been fixed on Wall Street?




The California Independent System Operator, which has jurisdiction over 80% of the state's electrical transmission estimates that JPMorgan may have gamed the state's power market for $57 million in improper payments over six months in 2010 and 2011.But that could be just the tip of the iceberg: The bank continued its activities past that time frame. JPMorgan's alleged manipulation could have helped throw the entire energy market out of whack, imposing what could be incalculable costs on ratepayers.




The Federal Energy Regulatory Commission, in December accused Deutsche Bank of manipulating the California market and in March extracted a $245-million settlement from Baltimore-based Constellation Energy over charges it made manipulative trades in the New York market. (The Deutsche Bank determination is "preliminary" and subject to further investigation.) Hints of JPMorgan's behavior leaked out this month, when FERC went to court to demand unedited versions of emails it had subpoenaed from the bank. JPMorgans's response to the documents – stonewalling. The California ISO hasn't been very forthcoming with details of JPMorgan's alleged misdeeds. Its public filings don't even name the bank; it was FERC's court brief that fingered JPMorgan.


According to ISO documents, JPMorgan's scheme got discovered only because the firm was collecting so much in excessive payments that it became hard to miss. The scheme apparently involved rigging bids for electricity; this was nothing that improved the electric grid, did not help the efficent distribution of electricity; did not produce jobs; and did not add any economic value. They got greedy, real greedy. FERC says it has the legal authority to return the state's wholesale market to a utility model, in which generators would get paid only for their true cost of generation, plus a reasonable financial return. It also has the authority to place trading restrictions on JPMorgan or any other market participant it finds guilty of manipulation. No word yet on the next step.


If it all sounds familiar, that's because we've seen this movie before – it was called Enron. Basically the same sleazy deal. And you've got to wonder who the auditors are for JPMorgan? Didn't they learn anything from what happened to Arthur Anderson? And when do the enablers become just as guilty as the perpetrators? And 12 years after the collapse of Enron we're asking the question again – why hasn't anything been fixed on Wall Street? 

Wednesday, May 9, 2012 - Greek Government, Spanish Banks, Gold Prices - It's All Messy

DOW – 97 = 12,835
SPX – 9 = 1354
NAS – 11 = 2934
10 YR YLD unch = 1.84%

OIL - .56 = 96.45
GOLD – 15.40 = 1590.40
SILV - .20 = 29.37
PLAT – 12.00 = 1505.00

The Greek tragedy continues; no success so far in negotiations to form a coalition government after weekend elections resulted in a deadlock. It looks like there might be another election in June. The Greeks accepted another $5 billion dollar bailout payment today, so they keep the government afloat for a few more weeks. Now, the chatter is shifting to the very real idea that Greece will exit the Euro, and trying to figure out the implications. The concern is that exiting the Eurozone is going to be impossible and possibly will trigger a cascade of bad economic consequences. Absolutely right, but only because it might be done in an uncontrolled manner.

The Federal Reserve and the ECB and the IMF and all the others have been saying that the Euro-crisis is under control. If, or when Greece exits the Euro, nobody should be surprised; this train has been rolling down the track for a couple of years, and the Germans and ECB and IMF and Fed all had plenty of time to come up with solutions. And they didn't. So, now the Greek voters have come up with a solution. They didn't come up with a unanimous decision, not even a plurality. The whole thing was a crazy mish-mash of votes, ranging from communists to neo-nazis. Sometimes democracy is messy, but it looks like it has produced a solution in Greece.

Spain took over Bankia, the country's fourth biggest lender. In a deal that will give the state a 45 percent indirect stake in Bankia, the government will take control of its parent company BFA by converting into equity a 4.5 billion euro loan it had given the financial group previously. The economy ministry pledged to do all it takes to clean up Bankia, which has more than 30 billion euros of exposure to troubled loans to property developers and repossessed land and buildings. The government is expected to lend or give Bankia up to 10 billion euros in additional aid and it is widely expected that the bank will need more.

Since the banking crisis began, Spain has bailed out seven smaller savings banks, but the Bankia rescue is by far the biggest and it comes after a string of other banking reform plans revealed over the past week. These include moving toxic assets out of some banks and demanding that banks set aside 35 billion euros against loans to the building sector, on top of 54 billion euros the banks are already provisioning.

Prime Minister Mariano Rajoy had promised not to use state funds to rescue the banks, but mounting doubts over Bankia had shaken the euro zone and he did a U-turn. And if you're wondering why voters in France voted the way they voted, or why the voters in Greece went to such extremes. Here is the answer. Spain demands austerity from its citizens and then bails out the banks. The politicians promise they won't bail out the banks and it's just a lie. Where does all the money go? To the banks.

As concerns about Spanish banks grow, there are warning that Europe's banking system urgently needs to be overhauled, otherwise the entire monetary union could be in jeopardy. The continent's leaders missed their chance to reform the system in the wake of the 2008 financial crisis, and are now paying the price. At a press conference last week, ECB President Mario Draghi admitted the temporary European Financial Stability Facility (EFSF, also known as the Euro Fubar Slush Fund), the rescue fund for cash-strapped euro-zone countries, has not been very successful Draghi said: "Its functioning fell short of both expectations and needs.” He did not say exactly what is wrong with the fund and what needs to be changed. He failed to mention that the ECB has long been exploring ways of expanding the scope of the EFSF, or its permanent successor, the European Stability Mechanism (ESM, also known as the Euro Slush Mechanism), to give the bailout mechanism more firepower.

Spanish banks are particularly unsteady. They are sitting on roughly 1 trillion-euro ($1.3 trillion) in shaky loans related to the ailing real estate sector. The estimates for the cash shortfall range from 50 billion-euro to 200 billion-euro. The German government wants to prevent the bailing out of Spanish banks from setting a precedent. Bailing out German banks at the taxpayers' expense has already not been particularly popular. What's more, it would hardly end with bailouts for Spanish banks. Ireland, which only had to be bailed out by the rescue fund because of its banks, and thus has a much higher level of government debt than Spain, could insist on equal treatment.

So, after all this time, nobody wants to bailout the banks, and yet, nobody has a better idea. Well, nobody but the Greeks.

Moody’s Investors Service will this month start cutting the credit ratings of more than 100 banks, a move that risks pushing up their funding costs and probably curbing lending. BNP Paribas, France’s biggest lender, Deutsche Bank, Germany’s largest, and New York-based Morgan Stanley are among firms that face having their short- and long-term debt downgraded to their lowest-ever levels by Moody’s.

The cuts follow downgrades by Standard & Poor’s and Fitch Ratings last year; and the fear is the cuts could erode profits, trigger margin calls and leave some firms unable to borrow from money market funds that have strict rules on who they can lend to. Without access to funding from private sources, banks have had to sell assets and reduce lending. I’d like to say the views of the rating agencies don’t matter anymore but, unfortunately, they do.

The Federal Reserve has for the first time given approval for a large Chinese bank to purchase a US bank. It also gave approval to two other large Chinese banks to expand their operations in the United States.

The Fed approved the application of the Industrial and Commerce Bank of China Limited, China’s largest bank, and two other Chinese firms to purchase The Bank of East Asia U.S.A., located in New York City. The Fed also approved an application by the Bank of China to set up a branch in Chicago and an application by the Agricultural Bank of China Limited to establish a branch in New York City.

It's tough to beat the kind of year Exxon Mobil had in 2011. Shares rose by 20% and profits surged by 35% to $41.1 billion. Revenues jumped 28% to $452.9 billion, helping Exxon reclaim the top spot in the Fortune 500. Wal-Mart slipped to No. 2 in the Fortune 500 in 2011 after holding onto the top spot for two years in a row. The retailer was forced to aggressively cut prices to reverse its declining same store sales in the U.S. That helped push revenues up by 6% during 2011, to $447 billion, but it hurt Wal-Mart's bottom line -- profits declined by 4.6% during the year, to $15.7 billion.

Gold prices have been trading lower this week and futures prices hit a 17 week low this morning before recovering through the trading session. It is becoming apparent that Greece will have a difficult time remaining in the Euro-Union. And many people are more worried about Spain than Greece. The US dollar index has benefited recently on safe-haven demand due to the EU situation. The dollar may have problems but it is the cleanest shirt in a hamper full of dirty laundry. The lower prices have spread through the commodities markets, not just precious metals; it appears to be part of a risk-off response to the European Union debt and financial crisis. Crude oil hit a four and a half month low on Monday, and traded lower today; over the past five sessions, oil is down about 10%. As recently as last month, ever higher crude oil prices and $5 a gallon gas were still regarded as possible. Since then gas prices have dropped to levels much lower than they were a year ago.

Back to the metals; why isn't gold performing as a safe-haven investment? Consider that the metals are a measure of how well the currency is being managed. Right now the US dollar is being reasonably well managed compared to other currencies; the cleanest shirt theory. With all the problems in Europe, it is fairly obvious that central banks are printing a whole bunch of currency in order to bail out banks and countries. The ECB and the IMF have already dished out about $2 trillion dollars in bailouts over the past six months, and there is almost certainly going to be more. And so, you're probably wondering why gold isn't selling for about $10,000 an ounce. And the answer is that gold and silver prices are manipulated. I'm not big into conspiracies, but seriously, if you were printing a currency would you want to see gold prices jump up to $5,000? And if gold hit $10,000 we would all be talking about the collapse of the dollar; we would all be talking about how Federal Reserve notes are nothing but counterfeit paper. We would all be crying about the failure of the Fed. And considering the relatively small market for gold and silver, it shouldn't surprise anybody that the markets are manipulated. You should remember that the investment market for gold is quite small. Wal-Mart has a bigger market valuation than the entire market for gold.

Seriously, I'm not a conspiracy theorist. This is what the Fed does. They manipulate the amount of money in circulation. The M1 through whatever M amount; they have a printing press. They manipulate interest rates; every few weeks they have a meeting and then they announce how they decided to manipulate rates. In turn, they manipulate bonds and mortgages and all manner of debts. They manipulate stocks. We used to call it the Plunge Protection Team until we learned the real name, “The President's Working Group on Financial Markets”. The price of oil is manipulated by use of the strategic reserves and cafe requirements on one side to out and out war on the other end of the scale. The government pays farmers to grow or not grow certain crops – which sounds like they manipulate the price of food. From time to time, the CME will change margins on the precious metal futures – that manipulates the price.

If you were going to have a major monetary easing in the near future, (like maybe if Greece exits the EU, or maybe at the June 19 FOMC meeting) if you were planning something that would devalue the dollar and run the risk of inflation – you would come out and say inflation is under control and you remain vigilant – you would suppress gold prices – and you wouldn’t tell people your real plans.

Why would you want to buy gold and silver if you know the prices are artificially low? Back to basic supply and demand. Think of it like a balloon being held under water. The price is being pushed down. And think of demand as the air that fills that balloon. Demand is currently expanding. Admittedly, the technical levels for gold are making holders nervous, but long term holders are probably looking at these prices as a chance to buy the dip.