Friday, March 14, 2014 - The Circle of Life

The Circle of Life

by Sinclair Noe

DOW – 43 = 16,065
SPX – 5 = 1841
NAS – 15 = 4245
10 YR YLD - .01 = 2.64%
OIL + .81 = 99.01
GOLD + 10.90 = 1383.00
SILV + .29 = 21.56

In economic news, the early-March consumer sentiment index fell to 79.9. That’s down from a final February reading of 81.6 but the latest number is within the range of numbers posted since November.

A separate report from the Labor Department shows the producer price index dropped o.1% last month. The PPI measures inflation at the wholesale level. Final demand for goods rose 0.4% in February. Final demand for services dropped 0.3%. Producer prices excluding volatile food and energy costs fell 0.2%. In the 12 months through February, producer prices increased 0.9%, the smallest one-year gain since May 2013. Inflation is not a concern. The economy is still too sluggish to generate inflation.

There are two big news stories of the day: Flight 370 and Ukraine. We don’t know anything about either. A total absence of actual information about the missing Malaysian flight is not in any way hindering 24 hour news coverage of the story. Facts have given way to fantastic fantasizing about everything from terrorism to hidden island airstrips to alien abductions. The news networks have been gathering tons of erroneous and conflicting reports which they immediately pass to their viewers. They must think we’re all morons.

Secretary of State John Kerry and his Russian counterpart Sergei Lavrov wrapped up meetings in London by announcing they have no common vision on the crisis in Ukraine. Russia will go forward with a referendum vote on Crimean sovereignty on Sunday. Monday will be a strange day as we watch the markets try to weave a narrative.

The Swiss bank UBS said it will conduct an internal review of its precious metals business amid expanding regulatory investigations into potential manipulation of interest rates and the price of commodities and currencies. European regulators began looking at other benchmark rates, including for gold and silver, as part of an outgrowth of its investigation of rigging of the London interbank offered rate, or Libor, and other global interest rate benchmarks. The process of setting the benchmark price for gold in London dates to 1919. It is set twice a day by five firms that serve as market makers; those market makers are: Barclays, Societe Generale, Deusche Bank, Scotiabank, and HSBC.

The Hong Kong Monetary Authority said that after an investigation of nine banks that were part of the local consortium making daily submissions to determine the Hong Kong Interbank Offered Rate, which is used as a benchmark to price corporate loans, household mortgages and other types of debt; only UBS was found to have tried to manipulate the rate, but the regulators conclude that they were not good at rigging the rate, so no fines have been levied.

Today the Federal Deposit Insurance Corp sued 16 of the world's largest banks, accusing them of cheating dozens of other now defunct banks by manipulating the Libor interest rate. The big global banks broke certain swaps contracts they had entered into with the now-closed banks by separately colluding to rig the Libor rate to which the contracts were tied. Some of the big banks have already paid fines to resolve the charges; but the big banks are also being sued by investors and other who claim they lost money due to the manipulation.

A federal judge last March dismissed many of those claims that were based on antitrust law, but has yet to rule on cases that rely on the "breach of contract" theory used by the FDIC.

The Inspector General for the Department of Justice has released a report that basically says the crackdown on mortgage fraud is a joke. In 2010, Attorney General Eric Holder said, “mortgage fraud crimes have reached crisis proportions, but we are fighting back.” The only problem is it didn’t happen. More money was given to the FBI, but the inspector general’s report shows that the FBI considered mortgage fraud to be its lowest-ranked national criminal priority.

Holder announced in 2012 that prosecutors had charged more than 530 people over the previous year in mortgage fraud related cases, but the new report says the actual number of cases was 107. Yep, the regulators are now cooking the books.

Yesterday we reported that Wall Street bonuses grew 15% last year to more than $26.7 billion, or an average of $164,000 per employee, according to the New York Comptroller; it marked the third highest bonus payout on record. The average salary including bonuses in 2012 was $360,700, or more than five times greater than the rest of the private sector. The average Wall Street bonus is now 7 times larger than it was 30 years ago. Meanwhile the median household income has been stagnant for the past 30 years.

People who park their savings in these big banks accept a lower interest rate on deposits or loans than they require from America’s smaller banks. That’s because smaller banks are riskier places to park money. Smaller banks won’t be bailed out if they get into trouble; big banks are too big to fail. That implied government protection is like a hidden subsidy for the big banks, and it affords them a competitive advantage, and allows them to rake in more profits than smaller rivals.

How large is this hidden subsidy? Two IMF researchers have calculated it’s about eight tenths of a percentage point; and based on the total amount of money parked at the 10 biggest Wall Street banks that works out to a subsidy of about $83 billion a year. The top 5 banks account for $64 billion of the $83 billion subsidy; and that pretty much equals the top 5 banks average annual profits. Bottom line, no subsidy, no bonus pool.

Meanwhile, I almost missed this story from Tuesday. In Vermont, 15 towns have voted to support the creation of a public bank in Vermont, calling for the state legislature to establish such a bank and urging passage of legislation designed to begin its implementation. The specific proposal under consideration, Senate Bill 204, would turn an existing agency, the Vermont Economic Development Authority, into a public bank that would accept deposits and issue loans for in-state projects.

Currently, the only state in the US to maintain a public state bank is North Dakota. However, since the financial downturn of 2008, other states have looked into replicating the North Dakota model as a way to buck Wall Street while taking more control of state and local finances.

Here’s how the public bank in North Dakota works: All state revenues must be deposited with the state public bank by law.  The bank pays no bonuses, fees or commissions; does no advertising; and maintains no branches beyond the main office in Bismarck. The bank offers cheap credit lines to state and local government agencies. There are low-interest loans for designated project finance. The Bank of North Dakota underwrites municipal bonds, funds disaster relief and supports student loans. It partners with local commercial banks to increase lending across the state and pays competitive interest rates on state deposits. For the past ten years, it has been paying a dividend to the state.

An economic study on a public bank in Vermont suggests the plan would create 2,500 new jobs and increase the gross state product by more than $340 million, with no new appropriations or bonding to establish the bank.

And we wrap up with this; today is Pi Day. March 14, or expressed another way 3-14, which happen to be the first 3 digits of pi, that Greek letter that has come to be defined as the ratio of a circle’s circumference to its diameter; in other words the ratio of the linear distance around the edge of a circular object to its measure of a straight line going through the center of a circle connecting two points on the circumference. So, if you want to know the circumference of a circle you could just multiply the diameter times 3.14 (pi). This also happens to be the birthday of Albert Einstein, which just makes both all the more intriguing.  A year from today, the date will be 3-14-15, which happens to be the first 5 digits of pi; it’s a once in a lifetime event.

Pi is, of course, an irrational number, which means it cannot be expressed as a ratio. It’s a decimal that’s neither finite (like 2.0 or 2.2) nor repeating (like 3.3333) nor periodic (like 9.1818). It just keeps going past 3.14159 for as long as you’d like to take it. Some people have done the calculation out to more than 2 trillion decimal places, with the help of computers. And so we consider pi to be infinite.

Another way to consider this is that there is no perfect circle. Or we might say that since pi is an infinite, non-repeating decimal every possible number combination exists somewhere in pi’s infinite sequence of numbers, and if you were to convert it to ASCII text, somewhere in that infinite string of digits is the name of every person you will ever love, or even meet, plus the date, time and manner of your death, and every question and every possible answer, and all the mysteries of the universe are contained in this infinite sequence of digits, and the only way we can wrap our minds around it is to think of it as a circle.

Celebrate safely.

Friday, October 18, 2013 - Biscuits on the Dark Side of the Moon

Biscuits on the Dark Side of the Moon

by Sinclair Noe

DOW + 28 = 15,399
SPX + 11 = 1744
NAS + 51 = 3914
10 YR YLD un = 2.59%
OIL + .28 = 101.15
GOLD – 2.70 = 1318.40
SILV + .07 = 22.06

There will be a lunar eclipse a little later this hour. In the West we won't see it, but you can phone your friends in the East. Maybe it explains something.

The S&P 500 index hit another all time record close.

Tobias Levkovich is the chief US equity strategist for Citigroup, and he may have had the best analysis of post-deal state of the markets: “Kicking the proverbial can down the street does not address the long-term fiscal imbalances. The twin decisions of a taper timing push out and the discord in Washington being swept under the rug until January and February roll in could keep P/E multiples more compressed as equity risk premiums stay elevated. Investors typically do not like uncertainty and it is hard to determine how these recent almost non-decisions can be seen as reinvigorating confidence aside from some relief that an imminent likely disaster has been avoided. Nonetheless, one cannot respectably believe that things truly have turned for the better as opposed to averting the worst. The long-term growth of non-discretionary government spending can still prove to be an overwhelming liability and it has not been the primary focus for legislators.”

Larry Summers will not be the next Federal Reserve Chairman, and maybe that gives him a little more time to reflect. In an interview with Charlie Rose, Summers addressed the core problem with the recent and upcoming budget battles: “ I don't know why the obsession should be with entitlements, like the test of a country is did we scale back entitlements? No, the test of the country is did we have a stronger economy for our children than we had for ourselves. That's what is in doubt and that's what we should be focusing on.”

The Iowa Electronic Markets is the only sportsbook in America allowed to bet on US elections. Next year’s midterm elections for Congress are now a tossup between the Republicans and the Democrats. Of course the odds will change over the next year. The attention span of the average voter is …, I'm sorry, what was that?

A Time magazine article published today suggests that Texas Senator Ted Cruz, leader of the conservative effort to tie a curtailment of Obamacare to funding the government, is coming under scrutiny for failing to disclose ties to a Caribbean-based private equity fund; a possible violation of ethics rules. Cruz told Time that the omission was inadvertent and that he is in the process of making corrections to his Senate financial disclosure form.

The government shutdown started on October 1^st; since then the top performing asset classes have been equities, specifically the stock markets in Japan, Spain, the US, and Italy. And of course, Google, which has now become an asset class all its own.

Google joined the $1,000 per share club today, following a better than expected earnings report last night. Google went public in 2004 at $85 a share. Google reported earnings of $10.74 per share, well ahead of consensus estimates of $10.34.

In other earnings news, both General Electric and Morgan Stanley topped Wall Street expectations for the third quarter. GE shares gained 3.6% and Morgan Stanley rose 2.6%.

Home price gains are slowing after a strong bounce off the bottom, potentially marking a new phase for the housing recovery. According to a report from Zillow, home values aren't rising as fast as they were and even dipped in a few hot markets in September. More homes are coming on the market, and Realtors report less competition among buyers.

A new report from PriceCoopersWaterhouse says funding for US startups rose in the third quarter from year-ago levels, as venture capitalists poured money into a growing number of fledging software companies. Total investments in startups rose 17% to $7.7 billion from $6.6 billion in the July-September quarter of 2012. The number of deals rose 7% to 1,005 from 937. The software industry pulled down the largest chunk of funding, nearly $3.6 billion.

The dollar fell to eight-and-a-half-month lows against the euro; down around 1 percent on the week. The Chinese economy grew at an annual rate of 7.8% in the third quarter, accelerating from the second quarter's 7.5% increase.

The 11th-hour agreement to raise the limit on US government borrowing and end a 16-day government shutdown also averted a default on Treasury bonds that had threatened the global financial system, and exposed the vulnerabilities of the economic revival plans of other countries, especially Japan and China. Perhaps no two economies outside the United States have more at stake in Washington's recurring drama than Japan and China. Not only are they the second- and third-largest economies, but they lend Washington more money than any other single nation. Both nations have adopted policies to revitalize their own economies that to some extent rely on the improving economic appetite, stable currency and increasing indebtedness of the US.

There are no bond markets large enough to give China and Japan an alternative to U.S. Treasuries for the dollars they accumulate selling exports. So the prospect of another U.S. default drama next year is likely to lend new urgency to China's preferred solution: conducting less trade in dollars and more in renminbi.

Very Serious People are warning that China might lose confidence in America and start dumping our bonds. That might not be such a bad thing. China selling our bonds wouldn’t drive up short-term interest rates, which are set by the Fed. It’s not clear why it would drive up long-term rates, either, since these mainly reflect expected short-term rates. And even if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy those bonds up. China could, possibly, depress the value of the dollar. But that would be good for America; a boon for American exporters.

And a US default would be very bad indeed for Japan, which is attempting to revive domestic consumption and investment, in part, by weakening the yen as part of the policy known as Abenomics. A US default would likely prompt investors to buy yen.

Bottom line is that there will be more talk about an alternative to the dollar as a reserve currency, but there is no place to run. At least not at this time.

The Murdoch Street Journal reports JPMorgan Chase has reached a tentative $4 billion deal with the Federal Housing Finance Agency to settle claims that the bank misled government-sponsored mortgage agencies about the quality of mortgages it sold to them during the housing boom. The deal is for less than the $6 billion the agency initially sought.

HSBC Group just lost, again; this time a $2.46 billion judgment in a long-running securities fraud lawsuit. The shareholder lawsuit alleged that Household International, now known as the HSBC Finance Corporation, misled investors about its lending practices, the quality of its loans and its accounting between 1999 and 2002. The lawsuit has wound its way through United States courts for 11 years and has been regularly noted in HSBC’s corporate filings. A federal jury in 2009 in Chicago found partially in favor of the shareholders, but HSBC and the other defendants have repeatedly challenged that verdict. Yesterday, the $2.46 billion dollar decision was announced in Federal District Court in Chicago. HSBC says it will appeal.

How much does a hamburger on the Dollar Menu cost?

Wrong, it costs much more. The fast-food industry costs US taxpayers about $7 billion a year, according to a report released this week. Researchers at the University of California at Berkeley and the University of Illinois said this subsidy comes about because 52% of fast-food workers are paid so poorly that they must rely on public assistance programs such as Medicaid and earned income tax credits. The fast food industry earns profits, pays dividends to shareholders, and pretty good wages to CEO's, but they stick the low wage costs on taxpayers, whether you eat their food or not.

Taco Bell and McDonald's are welfare queens. There is no free lunch. There is not even, really, a Dollar Menu.

 In 1965, CEOs at big companies earned, on average, about twenty times as much as their typical employee. These days, CEOs earn about two hundred and seventy times as much. That huge gap between the top and the middle is the result of a boom in executive compensation, which rose eight hundred and seventy-six per cent between 1978 and 2011. Last month, the SEC unveiled a rule to require companies to disclose the ratio of the CEOs pay to that of the median worker. The drive for transparency has actually helped fuel the spiralling salaries. For one thing, it gives executives a good idea of how much they can get away with asking for. The idea behind transparency is that full disclosure would embarrass companies enough to restrain executive pay, but the reality is that people who can ask to be paid a hundred million dollars are beyond embarrassment. A more crucial reason, though, has to do with the way boards of directors set salaries.

Boards tend to be comprised of members from peer companies that are bigger and tend to pay their own CEOs more. Also, boards tend to look at the CEO salaries of peer group firms and then peg their CEO's pay to the fiftieth, or seventy-fifth, or ninetieth percentile of the peer group; never lower. With all the companies following the same protocol, salaries ratchet higher, regardless of performance. It's known as the Lake Wobegone effect, where all the CEOs are above average.

Today's program has been brought to you in part by Powdermilk Biscuits. Heavens they're tasty and expeditious. 

Wednesday, July 03, 2013 - Independence Day

Independence Day

by Sinclair Noe

DOW + 56 = 14,988
SPX + 1 = 1615
NAS + 10 = 3443

10 YR YLD + .03 = 2.50%
OIL + 1.64 = 101.24
GOLD + 10.10 = 1253.50
SILV + .34 = 19.82

Today is Independence Day. I know; the Fourth of July is tomorrow, but it is Independence Day in Egypt, or Coup Day, or something. They had huge crowds in Tahrir Square and they celebrated with fireworks, so let's called it Independence Day. We're not really sure what it is, but we know a few things. There has been a revolution. The Egyptian army has overthrown President Mohamed Morsi, announcing a roadmap for the country’s political future that will be implemented by a national reconciliation committee.

The head of Egypt's armed forces issued a declaration today suspending the constitution and appointing the head of the constitutional court as interim head of state. Morsi's presidential Facebook page quoted the disposed president as saying he rejected the army statement as a military coup. Morsi was the head of the Muslim Brotherhood and he had served for one year as president, after being democratically elected, following the revolution that overthrew the sort-of democratically elected dictator Hosni Mubarak. Democracy can be messy. And these are messy, noisy, uncertain and unpredictable days for Egypt.

The country is in unchartered territory. The economy is under severe pressure. Most institutions are weak. A credible leader is yet to emerge with widespread support. And, to make things worse, there is no play book. The mood on the street may look joyful but the situation could easily turn violent.

Nobody really knows what will happen next, but the Egyptian people took to the streets to say that what had been happening was not acceptable. They are no longer fearful or ambivalent about their government. With a little luck, maybe something good will come from all this.

Yesterday we talked about the doubling of interest rates on student debt. It shot up to 6.8% from 3.4% for new loans. So, the next time you go to a college graduation, look past the caps and gowns and make sure you notice the ball and chain most graduates are wearing as they march onstage to receive their diplomas. That's student loan debt, which at over $1 trillion tops credit card debt in the U.S. today. The average burden is $28,000, but add in their credit cards and they're graduating with an average of $35,000 in debt. It's no wonder that people who've paid off their student loan debt are 36 percent more likely to own homes than those who haven't.

A growing number of voices, including the Fed, are pointing to the way this debt burden is a drag not just on the borrowers but the wider economy. One survey found that student debt reduces average aggregate car purchasing by $6.4 billion a year. Young people are leaving school with the kind of debt that was once only incurred by the purchase of a first home; not surprisingly, it's depressing home buying too.

According to the Federal Reserve Bank, two-thirds of college graduates leave with some debt, and 37 million Americans are repaying a student loan right now. And the grads who graduate with no debt are the really lucky ones. The grads who graduate with debt are semi-lucky – they get a degree and a chance at emplyment. Lots of students don't graduate but still have debt. And then, about one-third of high school graduates aren't luck enough to go to college.

We shouldn't even call them student "loans," because you can't refinance them, and you can't get out from under them by declaring bankruptcy. It's more like indenture. Thanks to the Bankruptcy Reform act of 2005, there's no statute of limitation on collecting student loans, and lenders can garnish wages, tax refunds and even Social Security checks. Back in 2007, now-Sen. Elizabeth Warren asked: "Why should students who are trying to finance an education be treated more harshly than someone … who racked up tens of thousands of dollars gambling?" Nothing's changed, although Warren is part of a limited number of people in Congress who are trying. Now, Warren has proposed that student loans should get the same interest rates as banksters. You know, the Fed should offer money for education at the same ¼% that they give money to the big banks.

Following World War II, GI's returned home and went to school, and it was financed through the GI Bill. That one thing created more wealth than any other single thing in our nation's history. In theory and to a significant extent in practice, any GI could, if they worked hard enough, get a bachelor's degree from one of the best universities in the country (and, therefore, in the world), almost free of charge. The pronounced social and economic mobility of the postwar period would have been unthinkable without institutions of mass higher education, provided at public expense. The result was a highly educated population, relative to the pre-war years, that went on to productive work. And that in turn led to the greatest expansion of the middle class that we've ever seen.

Once upon a time, states competed to expand their public university systems - and many were free, or close to it. The stellar University of California system was tuition free (though there were fees) until the late 60's; so was the City University of New York system for a long time, and Arizona universities, and plenty of other states. Now, California is one of at least 10 states that now spends more on prison than higher education. I haven't seen any studies that make a direct link, but I'm pretty sure the two are connected.

A federal judge has approved HSBC's $1.9 billion settlement for money laundering. While noting "heavy public criticism" of the settlement, which enabled HSBC to escape criminal prosecution, US District Judge John Gleeson, New York, called the decision to approve the accord "easy, for it accomplishes a great deal."

The settlement was announced last December, but it required approval. The settlement includes $1.25 billion in forfeitures and $665 million in civil fines. The settlement is part of a deferred prosecution agreement, or DPA, that runs for 5 years. That means that the bank has to avoid doing the bad things they did, or they could be indicted. I've never heard of a major bank operating under a DPA that actually has been indicted for violating the DPA, but that's the theory.

And what are the bad things HSBC is accused of doing? Well for years they laundered money on behalf of Colombian and Mexican drug cartels. They laundered money for customers in Burma, Cuba, Sudan, Libya, and Iran, which were all subject to US sanctions. They dealt with drug dealers, murderers, terrorists, and other unsavory types and they made sure the bad guys had money to do bad things. But don't worry, it's not criminal; it's just a civil case.

Judge Gleeson said he had received requests from the public to reject the agreement because it did not hold HSBC criminally liable. He also read numerous editorials and columns suggesting, as one put it, that HSBC was "too big to indict." Gleeson, nonetheless, said "significant deference" was owed to the Obama administration in deciding not to press an indictment. Gleeson said "much of what might have been accomplished by a criminal conviction has been agreed to in the DPA," whose administration he will supervise.

This is not true. The settlement does not accomplish much. What the judge has done is to shred the justice system once again; it seems to be common practice these days. Judgments such as this just create a two-tiered justice system. And we accept it out of ambivalence and fear. One set of laws for the rich and powerful, another set of laws for everyone else. Maybe we should require that judge to recite the Pledge of Allegiance every morning to start the court day. Maybe he could read that segment about “justice for all”; not just punishment for the poor folk; not just an agreement to tie executive bonuses to meeting compliance standards; not just coddling the bag men for murderers and drug dealers and terrorists; not just a slap on the wrist if you hold a wad of money in your hand. Justice for all. What a joke.

Which brings us to our next segment: “Where in the world is Edward Snowden?” We now know he was not on Evo Morales' presidential jet. The president of Bolivia had flown to Russia to meet with Russian President Vlad Putin. President Morales then tried to fly back to Bolivia. Someone, somewhere suspected that he was trying to sneak out with Snowden on board. Portugal, Spain, France, and Italy refused to allow the presidential jet to fly over their airspace. The plane circled around for a few hours and eventually landed in Austria. The plane was searched and they did not find Snowden.

Now, normally a presidential jet, like Air Force One, is considered to be something like an embassy; there is an issue of national sovereignty. So, there is more than a little outrage over a pretty serious diplomatic transgression. Bolivia's ambassador to the United Nations said "the orders came from the United States." From a diplomacy standpoint, one does not normally interfere with diplomats and high-ranking public officials in transit. It is extraordinary to prohibit passage through one's state air space en route to another state. Almost all the nations in South America have condemned the intervention.

So, we spend billions of dollars on high tech intelligence and spy stuff and we still can't figure out whether Snowden is in the Moscow airport or on the Bolivian presidential jet or who-knows-where.

What we have learned about Snowden is that he doesn't have $1.9 billion to pay a civil fine.

Thursday, May 30, 2013 - The Money Laundering Criminals at HSBC and Standard Chartered Continue to Skate

05302013 Script

The Money Laundering Criminals at HSBC and Standard Chartered Continue to Skate

by Sinclair Noe

DOW + 21 = 15,324
SPX + 6 = 1654
NAS + 23 = 3491
10 YR YLD un = 2.12%
OIL + .45 = 93.58
GOLD + 21.00 = 1414.70
SILV + .32 = 22.88
PLAT + 31.00 = 1487.00
PAL + 8.00 = 761.00

So, apparently Wall Street moved higher today because the economy looks weaker and that means the Fed won't taper or quit QE. It's twisted logic, but we figured it out a while back.

The weak economic news started with this week's initial claims for jobless benefits; applications increased by 10,000 to 354,000. One week does not make a trend. Next week we'll get the jobs report for the month of May. Today's figures were just a reminder that the Fed won't have an easy path to end QE without crushing the labor market.

In a separate report, the Commerce Department said first-quarter gross domestic product was revised down to 2.4%, down from an initial estimate of 2.5%.  The gain in first-quarter growth follows a sluggish increase of 0.4% in the fourth quarter. Consumer spending increased, but that was likely due to higher prices for gasoline and electricity. Government expenditures fell by 4.9%, up from initial estimates of a 4.1% drop. The bulk of the decline was in military spending. Inflation as measured by the PCE index was muted, rising just 1.0% overall or by 1.3% excluding food and energy.

So, the economy is slowing, the sequester cuts are just starting to kick in and act as a drag on the economy, and inflation is running at half the Fed's target, and the jobs market is weak. And don't forget the Fed is finding no help in the form of fiscal policy. Against this backdrop, it will be hard to make a case for ending QE.

There is a market “disconnect” between the world’s gloomy outlook and talk of tapering by the US Federal Reserve, the supposed moment when it starts to wind down its $85bn of monthly bond purchases. Yet the markets seem to be betting that the central banks will come to the rescue yet again if needed.

Maybe, but there is that slight risk the central bankers might feel the compulsion to strike a blow against moral hazard and display their displeasure for asset bubbles. In other words, we could see a nasty sell-off at some point. We have been through these episodes of putative Fed tightening twice since the Lehman crisis. Markets tanked in 2010 and again in 2012 after the Fed turned off the spigot.

Yet QE critics clearly have a point. As Pimco’s Bill Gross points it, there are “bubbles everywhere”. The Credit Suisse index of Global Risk Appetite has been flirting with the “euphoria” line, not far short of levels seen in 1987, 2000 and 2007. There is a big market disconnect. The Gini co-efficient of wealth inequality is soaring, which means that all the money that's been pouring into the markets isn't trickling down.

American households have rebuilt less than half of the wealth lost in the financial crisis, leaving them without the spending power to fuel a robust economic recovery. From the peak of the boom to the bottom of the bust, households watched nearly 40% of their net worth disappear amid sinking stock prices and the rubble of the real estate market. Since then, Americans have only been able to recapture 45 percent of that amount on average, after adjusting for inflation and population growth.

The report from the St. Louis Federal Reserve showed most of the improvement was due to gains in the stock market, which primarily benefit wealthy families. That means the recovery for other households has been even weaker. The report states: “A conclusion that the financial damage of the crisis and recession largely has been repaired is not justified.”

The economy is twice as large as it was three decades ago, and yet the typical American is earning about the same, adjusted for inflation. The notion that we can’t afford to invest in the education of our young, or rebuild our crumbling infrastructure, or continue to provide Social Security and Medicare and Medicaid, or expand health insurance is absurd. Maybe the Fed should look at tapering off QE. It doesn't really work. That doesn't mean they should eliminate stimulus; it just means they need to inject the stimulus directly into the veins of the middle class.

Remember last September when US authorities decided to fine HSBC for money laundering? It seemed a mere slap on the wrist. A new batch of emails and letters were released to a Washington-based advocacy group, Public Citizen, and they paint a picture of the Treasury Department making hasty decisions following more than a 10 year investigation. The pressure started to build when a New York state regulator threatened to revoke the banking license of another British bank, Standard Chartered.

Public Citizen is hoping to obtain even more documents under the Freedom of Information Act. The New york Department of Financial Services determined that Standard Chartered had laundered $250 billion in illegal transactions over nearly a decade of business with US-sanctioned countries including Libya, Burma and Sudan. The bank was fined $327 million.

HSBC took money laundering to the next level. In total, the bank's US and Mexican units failed to monitor more than $670 billion in wire transfers and more than $9.4 billion in purchases of US dollars from HSBC Mexico. - Bloomberg

HSBC laundered billions for murderous drug gangs around the world; in Mexico, they changed their teller's cages to accommodate the boxes of drug cash. HSBC aided Iranian entities to evade US financial sanctions on Iran. If Iran ever develops nuclear weapons, we can thank HSBC and Standard Chartered. HSBC aided terrorist organizations including Hamas, Hezbollah, and al Qaeda.

HSBC was fined $1.9 billion.

Now, Judge John Gleeson is considering cancelling December’s so-called deferred prosecution agreement that gave HSBC immunity from money laundering claims. This could leave the bank open to criminal prosecution and a ban from operating in America. However, HSBC disputes this.

The US Department of Justice (DoJ) is reportedly challenging Mr Gleeson’s need to sign off on the deal. The judge last mentioned the case in February, stating that he had not yet approved nor disapproved of the settlement.

In a statement, HSBC said: “For more than two years, our new leadership team in both New York and London has been implementing reforms and new controls, investing in compliance systems and staff, and putting in place the most effective global standards across our network to combat financial crime on a global basis.

“We are focused on taking all necessary steps to fulfill our obligation under the agreements with the US and UK governments, and on implementing effective global standards across HSBC.”

That would sound more credible if only they had stopped laundering money. In March, fresh money laundering and tax evasion allegations surfaced in Argentina.

Standard Chartered was forced to admit it had violated the International Emergency Economic Powers Act, and if they didn't misbehave, then the charge would be dismissed in two years. It only took a couple of months for Standard Chartered's Chairman John Peace to lie to reporters, and investors by claiming there was no “willful intention” to violate financial rules. US regulators then forced Chairman Peace to write an apology for lying about money laundering.

Nobody went to jail.

Nobody.

On Wednesday, the Department of Justice announced arrests for money laundering. The DOJ statement says: "Today, we strike a severe blow against a professional money laundering enterprise charged with laundering over $6 billion in criminal proceeds."

Nope, not Standard Chartered, not HSBC; they arrested some guy running an online mish-mash out of Costa Rica called Liberty Reserve, or as the Department of Justice described it: “a massive criminal enterprise”, and “the largest international money laundering prosecution in the history of the Department."

It sounds like puffery, but it's true, I guess. The Department of Justice did not prosecute HSBC or Standard Chartered for a combined $929 billion in money laundering. Now, that would have been something to brag about, but they handed out deferred prosecution agreements, which have been violated. Of course, the judge hasn't signed off on the deferred prosecution agreement; apparently feeling a twinge of remorse in letting these criminals off the hook in light of the fact that 35,000 people were brutally murdered at the hands of drug traffickers in Mexico, who then laundered money through HSBC. Or maybe the judge can't reconcile how HSBC faces no jail time, while the FBI reports that in 2011 there were 663,032 arrests in this country for marijuana possession.

Meanwhile, the Washington Post reports the Office of the Comptroller of the Currency is expanding a probe that began in 2011 with allegations that JPMorgan Chase was using error-filled documents in lawsuits against debtors. The regulatory agency is examining the process several banks use to verify consumers’ outstanding debt before taking legal action.

If it sounds familiar it is. Remember the housing crisis, and how mortgage servicers were accused of falsifying records and robo-signing thousands of documents without review? The banks did pretty much the same thing, filing thousands of lawsuits against delinquent credit card holders. Consumer lawyers began noting a number of collection cases built on shoddy records. 

Authorities in California, for example, say JPMorgan flooded the courts with lawsuits against credit card holders based on flimsy evidence that cardholders were in default. California Attorney general Kamal Harris filed a case against JPMorgan. Iowa attorney general Tom Miller is organizing a 50 state effort, a replay of the 50 state attorney general effort on mortgages. So, the OCC is now getting involved because it looks bad when the state AG's take the reins and the federal regulators act like they're in a coma.

A former JPMorgan employee claims nearly 23,000 delinquent accounts were riddled with inaccuracies. The bank fired her; she sued; the case was settled out of court.

And still, none of the banksters has been jailed.

Friday, January 11, 2013 - Meet the New Boss

Meet the New Boss

by Sinclair Noe

DOW + 17 = 13,488
SPX -.07 = 1472
NAS + 3 = 3125
10 YR YLD - .02 = 1.88%
OIL -.06 = 93.76
GOLD – 12.10 = 1663.70
SILV - .42 = 30.54

Within a few days, Tim Geithner will be gone from the Treasury. Geithner was at the center of the financial crisis, first in his role as President of the Federal Reserve Bank of New York and in 2009 as Treasury Secretary. In a recent exit interview he said: “It was a very bad crisis. No playbook. No road map. No clear precedent. If we had a different set of constraints, particularly in fiscal policy, then I think that the economic outcome could have been modestly better.”

To be fair, Geithner was handed a mess, and to his credit he did not turn it into a catastrophe, and there were constraints. Still, Geithner's tenure at Treasury has been a little less than satisfying. The Too Big to Fail banks are bigger than ever; they operate with an explicit public guarantee, and despite Geithner's dissatisfaction with constraints placed on him, he did little to challenge the banksters. Geithner quashed proposals to seize bonuses, impose new taxes or otherwise punish bankers. He claimed that it would have destabilized the banks; instead he created a moral hazard and a two-tiered system of justice; Too Big to Fail became Too Big to Jail and the result is the banksters now operate with impunity. At the same time Geithner was making sure the big banks weren't destabilized, it was far too easy to overlook the lack of stability on Main Street, as families lost their homes. Programs to modify the loans of American facing foreclosures were impotent at best. Geithner sought to incentivize banks to provide mortgage relief; what was needed was a swift kick.

Geithner will be replaced by Jack Lew. Both Geithner and Lew should be applauded for their decades of commitment to public service; they are both intelligent men, but it's disheartening that the President has once again tapped Wall Street for a key economic advisor. Back in 2006, Lew was the chief operating officer of Citigroup's Alternative Investment Unit, a proprietary trading group that oversaw a hedge fund that bet on the housing market to collapse. It's hard to imagine Lew is prepared to stand up to the banksters and fight for policies that protect working families. We need a treasury secretary who will work hard to break up too-big-to-fail financial institutions so that Wall Street cannot cause another massive financial crisis.

And so, this week we have federal regulators proudly announcing an $8.5 billion dollar settlement with 10 big banks in a deal that papers over a sham review of foreclosed loans. The original idea was to provide a review process; independent analysts would go over each mortgage loan and make sure the efforts at loan modification hadn't been bungled; make sure the paperwork wasn't deficient; make sure the fees weren't excessive; make sure the wrong family wasn't being kicked to the street; and make sure the banks weren't robo-signing reams of foreclosure documents without checking for accuracy. But the analysts and consultants didn't really work for the people; they worked for the banks. The reviews that were supposed to detect foreclosure shams were nothing more than a sham.

The comptroller’s office said that it had identified 654,000 potentially problematic foreclosures, a combination of 495,000 claims submitted by borrowers and 159,000 files that the consultants flagged for review. The regulator said it was still determining the number of reviews completed, but the consultants said that only a third of the loans were fully reviewed. Now that the review program is being shut down, we'll never really know the full extent of wrongdoing.

And because the regulators don't know how many borrowers were actually harmed, this week's settlement will be spread out among 3.8 million borrowers; some who don't deserve anything, and not enough for those who were truly aggrieved. And for the 10 banks involved, no clawbacks of fees and profits, and no admission or denial of guilt.

And just last month, HSBC was fined $1.9 billion for money laundering. There were no criminal charges against any individuals, even though the bank admits to laundering billions for Mexican drug cartels, violating the Bank Secrecy Act and also the Trading with the Enemy Act. There were no criminal prosecutions against the bank either. The money laundering was brazen. The bank gave special boxes to the drug cartels, so they could fit their cash deposits through the bank tellers' windows. Other bank employees directed terrorist groups on how to circumvent sanctions. Apparently the rationale of the government for not pursuing criminal cases against individuals at the bank was that to do so when the individuals were employees of such an important bank, might threaten the stability of the financial system.

Money laundering is taking the proceeds of crime, “illegitimate” money, and bringing it into the legitimate financial system so that the criminals can use that money without being tied to those terrible crimes – crimes like manufacturing and distributing drugs, selling people into the sex trade, trafficking in illegal weapons, and terrorist attacks against our troops, our embassies, and our country. This is not mere money we are talking about; it is the daily gang violence on the streets of our cities and towns, it is the increased likelihood that your children will be offered drugs in their schools, it is the abduction of children and selling them into the sex trade; it's the killing and maiming of troops in Afghanistan; the violence and political unrest around the world – all made possible by the banks. And not just HSBC.

HSBC Bank USA was already under a written agreement from 2003-2006 with US regulators to correct deficiencies in its anti-money laundering regime.  In a strikingly similar case, Wachovia was found to have allowed as much as $420 billion through its banks without money laundering controls.  $110 million of that was linked directly to Mexican drug cartels, just like the HSBC case.  Wachovia was fined $160 million, $110 million of which was just coughing up the ill-gotten gains and not an actual penalty.  Not one person was prosecuted.  Recently, Standard Chartered Bank was fined $667 million, and ING Bank was fined $619 million, for engaging in the same criminal activity HSBC was engaged in when it doctored wire transfer information in order to clear transactions from countries barred from accessing the U.S. financial system, like Iran. Again, not a single person is being prosecuted in those cases. If it sounds like a lot of money in fines, just consider that this morning, Wells-Fargo posted fourth quarter earnings of more than $5 billion – far more than the fines imposed on the banks I just mentioned.

And we find this acceptable because the regulators and politicians are afraid to force the banks to conduct business honestly and sensibly. Better to allow the banks to lubricate the transactions of drug cartels and terrorists than face a possible bank closure that might challenge the global banking system.

More than 4 years after the financial crisis nearly imploded the global financial system, a committee of central bankers and regulators from more than two dozen countries, including the United States, has disappointingly given in to lobbying by big banks; watering down rules meant to strengthen the global financial system. After the meltdown, it just made sense that the banks should set aside enough reserves to cover possible and potential losses. The committee unanimously rolled back the so-called Basel III rules that were adopted in 2010 to make them “more realistic”.

The banks argued that requiring them to hold most of their liquid reserves as cash and government securities would restrict their ability to lend to small businesses and consumers because they would have less money to lend. Instead of holding cash reserves or Treasury bonds in reserve, the banks want to be able to hold stocks, or mortgage-backed securities.

Large banks are second to none among institutions in arguing against regulations, no matter how reasonable and valuable in protecting both the public and the banks themselves against unwise behavior. The problem is that the new assets defined as liquid are precisely those that banks found difficult to value and trade in 2008. Relying on mortgage-backed securities to provide liquidity during a crisis is a recipe for disaster, and just stunningly stupid.

The reality is that the banks know that in a crisis they would receive emergency loans and capital from central banks and their governments, so why tie up their reserves with assets that provide only modest returns? And because the banks know they are Too Big to be allowed to fail, they dictate policy in ways that put the world at greater risk of another crisis.

Eighty years ago this month, Ferdinand Pecora, the former assistant district attorney for New York City, was appointed chief counsel for the US Senate Committee on Banking and Currency. In subsequent months, the hearings of the Pecora Commission featured many sensational revelations about the practices that led to the 1930’s financial crisis.

The Commission’s investigation led to far-reaching reform – most famously, the Glass-Steagall Act, which separated commercial and investment banking. But Glass-Steagall didn’t stop there. It created federal insurance for bank deposits. With unit banking (in which all operations are carried out in self-standing offices) viewed as unstable, banks were now permitted to branch more widely. Glass-Steagall also strengthened regulators’ ability to clamp down on lending for real-estate and stock-market speculation. Glass-Steagall separated the banks' deposit-taking and securities underwriting activities. If a bank wanted to gamble, they could, but they couldn't gamble with depositors' money; and if the bankers lost their bet, they lost their own money; they had skin in the game.

The hearings also led to passage of the Securities Act of 1933 and the Securities Exchange Act of 1934. Securities issuers and traders were required to release more information, and were subjected to higher transparency standards. The notion that capital markets could self-regulate was decisively rejected. The contrast with today is striking.

We have a watered down Dodd-Frank Act, largely written by the bankers. We have watered down Basel III rules. And we have banks acting illegally, conspiring with drug cartels and terrorists; and doing so with impunity. And there are stacks upon stacks of illegally laundered dollars bearing the signature of Timothy Geithner, and soon they will bear the loopty-loop signature of Jack Lew.

Wednesday, December 19, 2012 - You Can't Kill a Bank, Even With a Bushmaster

You Can't Kill a Bank, Even With a Bushmaster

by Sinclair Noe

DOW – 98 = 13,251
SPX – 10 = 1435
NAS – 10 = 3044
10 YR YLD -.03 = 1.80%
OIL + 1.49 = 89.42
GOLD – 5.00 = 1666.90
SILV - .66 = 31.08

All right, let's start with a refresher course; Libor stands for the London Interbank Offered Rate. It’s the rate at which banks are able to borrow money from each other. The lower a bank’s rate (banks submit their own rates) the healthier it’s deemed to be. If you're balance sheet is healthy, you get a low rate when you borrow. If your balance sheet is known to contain toxic assets, you have to pay a higher rate to borrow. The rates were especially indicative of banks’ health during the peak of the financial crisis when the markets were all but frozen and access to funds were limited.

The Libor rate is determined daily; sixteen banks submit their rates to an agency; the four highest rates are wiped out and the four lowest rates are wiped out. The result is averaged and the daily Libor rate is published. It would take more than one bank to manipulate the rates. But once the rate is published it affects trillions of dollars of financial instruments around the globe.

More than a dozen banks in the U.S. and Europe are under investigation for Libor rate rigging. Even though it is not really surprising, the sheer scope and audacity of the market manipulation involved in the latest bank scandal still manages to inspire a sense of awe and nauseum.

In July, Barclays reached a settlement on manipulating the Libor rate, and they paid a $450 million fine. Today, as expected, UBS, the Swiss bank agreed to a settlement of $1.5 billion for its role in manipulating Libor. The charges made against UBS show the bank not only manipulated the Libor rate to make itself look healthier to outsiders but also to make money by colluding with other banks. From a regulator’s perspective that’s a lot worse than lying a bit to appear in better condition.

According to the regulators, at least 45 different managers and traders were involved in a scheme to manipulate Libor. The manipulation was so pervasive that the U.K.'s Financial Services Authority says every single trade in which UBS was involved over five years was suspect. Regulators found at least 2,000 instances of certain manipulation. Where did they find this damning evidence? Emails. And the dumbest email is credited to an eager young trader trying to entice a banker to submit a fraudulent Libor rate. How do you entice a banker to commit a fraudulent act? Apparently bribery works.

“I will f***ing do one humongous deal with you ... I’ll pay you, you know, 50,000 dollars, 100,000 dollars ... whatever you want."

There is strong evidence to suggest that the UBS traders were incredibly stupid, including this exchange over IM: “dude don’t IM about all the Libor manipulating you’re doing.” Or, one way to read a lot of these exchanges is that many UBS Libor manipulators genuinely didn’t know that it wasn’t okay to lie about Libor, they had no sense of morality or right and wrong, and they felt not a twinge to ask other banks to lie about Libor, and offer bribes to interdealer brokers to get them to get other banks to lie about Libor. Libor was a number, and someone made it up, and so why wouldn’t you make it up to suit you, as opposed to otherwise?

The important thing about this settlement is not the fine, which UBS should have no trouble paying, even though it is going to cause the bank to take a loss in this quarter. The bank's share price was up 1 percent this morning, if that tells you anything about how much financial damage the settlement is going to do. What matters is that criminal charges are finally starting to be filed. Three former UBS traders have already been arrested in the U.K., and more arrests are coming in the U.S. So far, all the arrests are lower level traders, not the executives who clearly authorized and perhaps encouraged the collusion.

On top of that, prosecutors broke a taboo and actually filed a criminal charge against UBS itself, something they are typically too terrified to do. Of course, this charge was designed to do minimal damage; it was limited to UBS's unit in Japan, which pleaded guilty to one count of fraud, and it doesn't affect the rest of the bank. Still, a criminal charge is a criminal charge. Authorities are loath to prosecute big banks criminally because they consider it a "death sentence" for banks. Something we're not sure is completely accurate because, well, these banks never get killed off do they?

But prosecutors don't dare take the chance, because toppling these behemoths might crush the financial system. Of course, given that UBS and other big banks are constantly getting themselves into massive amounts of trouble, a death sentence might leave us all better off in the long run.

Still, the policy is to be nice to banks, even if they are evil. We need look no further than the money laundering bank HSBC. Bank regulators and Treasury opposed having HSBC admit the truth – that it violated the money-laundering statutes; that it was in business with drug cartels and terrorists. Not only would the truth lay bare the hypocrisy of the War on Drugs but it might not be nice to the money laundering bank. They warned that such a guilty plea could cause a systemic crisis because HSBC was too big to fail; it is systemically important. When Treasury warns DOJ that a prosecution could cause a global crisis there is no chance that the AG will override Treasury’s warning on his own initiative. That is why line prosecutors urged AG Holder to meet personally with Secretary Geithner to urge him to withdraw his objections to the proposed prosecution, but Holder apparently declined to seek a meeting. Instead, the DOJ accepted Treasury’s warning that HSBC was too big to prosecute because doing so would cause a global systemic crisis.

Libor manipulation cost Fannie Mae and Freddie Mac more than $3 billion, according to an estimate by a government watchdog, who recommends the government-owned mortgage giants sue the big banks.

That estimate and legal advice were made in a private report by Steve Linick, the inspector general for the Federal Housing Finance Agency, the regulator for Fannie and Freddie, which were taken over by the U.S. government during the financial crisis. Now, $3 billion isn't enough to keep us from going over the fiscal bunny hill, but it's nothing to sneeze at.

And yes, if you have a mortgage through Fannie or Freddie, it means that you are a victim of the Libor rate rigging scandal.

If you still think Libor fraud is a victimless crime, the muni-bond market has 6 billion reasons it begs to differ. States, cities and other municipal borrowers have lost at least $6 billion as a result of banks manipulating Libor.

This $6 billion in losses would come on top of the $4 billion that muni borrowers have already paid big banks to close out derivatives trades that went bad, partly because of Libor manipulation. This is all part of a study released in October.

The Libor investigations have implications for states and cities that are still contending with the fiscal legacy of the recession, which left them grappling with falling tax revenue and rising costs. States have had to deal with combined deficits of more than $500 billion since fiscal 2009, according to the Washington-based Center on Budget & Policy Priorities.

The losses came not because Libor manipulation affected borrowing costs, but because these bond issuers entered some $500 billion in interest-rate swaps with banks, according to some estimates. These swaps were a type of derivative, essentially an insurance policy the muni-bond issuers bought to protect themselves against interest rates rising. When interest rates -- Libor specifically -- fell instead, the muni-bond issuers lost a boatload of money on the swaps.

In other words, in the eyes of the muni-bond issuers, these banks tricked them into betting that interest rates were going to rise and then sold them derivatives to insure against rising rates, and then they colluded to manipulate the rates lower.

States and cities have been lawyering up, preparing to sue the banks over Libor manipulation, lawsuits that could ultimately cost the banks billions of dollars.

And finally,

Walmart sells almost everything inside its stores, including guns and ammunition and assault rifles. But some things are too dangerous to be sold in WalMart, including: a pregnant Barbie doll, a book by George Carlin, and the debut album by Sheryl Crow (because it includes lyrics about buying a gun at WalMart and shooting children). Proving once again that ideas are still more dangerous than the sword, or the Bushmaster assault rifle. I'm not sure how they measure up against an RPG, and it is my understanding that drones do not discriminate.