Hamlet Dies

by Sinclair Noe

Record Highs for Dow and S&P.

DOW + 169 = 15,460
SPX + 22 = 1675
NAS + 57 = 3578
10 YR YLD - .10 = 2.57%
OIL – 1.92 = 104.60
GOLD + 22.70 = 1286.60
SILV + .69 = 20.25

To taper or not to taper? That is the question.

Whether 'tis nobler in the mind

to suffer the slings and arrows of outrageous bond market feral hogs

or to feed the savage beasts with unending securities purchases.

Or to tighten against a Sea of non-existent inflationary troubles

And by opposing end them: to die, to sleep,

to slaughter the feral hogs at the Discount Window trough;

and end the thousand Natural shocks that markets are heir to?

Is that all? To taper, to tighten, perchance to Dream;

Aye, there's the rub.

For one is QE and the other is accommodative monetary policy,

while fiscal policy and structural reforms

are nothing more than ephemeral motions,

the stuff of what dreams may come,

When we have shuffled off this mortal coil.

Well, that's enough of our literary mosh pit for today. As I recall, Hamlet died.

The FOMC minutes released by the Fed yesterday, were much ado about nothing... sorry. There was a bunch of talk that boiled down to the basic idea that Quantitative Easing and interest rates are two separate policies. The FOMC bigwigs have no intention of raising the interest rate target; that is off limits. The securities purchases under QE will taper off at some point, but there were more in favor of continuing than quitting. And even when they do quit, it will be slow, or it will be a variation on the theme. For now, it just makes sense that they will continue, if for no other reason it is a way to structurally reform the capital reserves of the big banks; a job the politicians and the courts have been unwilling to undertake.

So, the big theme from the FOMC minutes is we can get the taper without higher rates. But the bond market may have something to say about that. After all, the Fed has been the biggest buyer in the bond market; remove the biggest buyer, and prices drop and rates go up. If or when the Fed tapers that just signals for a flood of money to exit bonds. Indeed we've seen massive redemptions in bond funds at the biggies: Pimco and Vanguard.

Then, if you look over at the Dollar Index you might think there has never been talk of taper. The greenback jumped off a cliff the past two days, although it did firm up in afternoon trading.

And thus the Native hue of Resolution
Is sicklied o'er, with the pale cast of Thought,
And enterprises of great pitch and moment,
With this regard their Currents turn awry,
And lose the name of Action.

The Fed is driving the markets. Make no mistake about it. If you are still inclined to fundamentals, you might be wondering what is driving the valuations. As we begin with the second-quarter earnings season, analyst expectations are calling for companies in the S&P 500 to see earnings growth in the neighborhood of 0.8%. Revenue growth, or lack thereof, will be another point of weakness but operating margins should remain supportive.

Over the past 4 years, improved earnings, and their accompanying stock market rallies, have been driven by cost cuts rather than strong profit growth. That can't last forever. Companies have been keeping the fire stoked by burning the furniture, then the doors, and now they're ripping the roof off the joint to keep the fires burning. There just isn't a lot more cost cutting that remains. Because of this, it is unlikely we will see many surprises in performance results in earnings this season.

So, the next question is whether valuations are enough to drive further rallies. Not really, but that's the wrong question because we know that this market is being driven by the Fed. Of course, valuations could lead to a long grind up even if we don't see a big rally. Some are already saying that today's record high close is nothing more than short covering; that's where traders who were shorting the market, betting it would go down, got caught and now have to buy back in to cover their positions.

Of course we can speculate on what is driving the market at any given moment but if you really want to make money like the pros, the trick is to be fast and early.

You've heard of the Consumer Confidence Index. The highly respected gauge of consumer sentiment is compiled by the University of Michigan and Thomson Reuters and released each month. And you can get it 2 seconds before the rest of the world, if you're willing to pay an extra $6,000 per month. The 2 second advantage really only has value to high frequency traders who can jump in ahead of the rest of the world and scalp a bit of profit. If that sounds like insider trading, it is.

New York Attorney General Eric Schneiderman has opened an investigation, saying: “The securities market should be a level playing field for all investors and the early release of market moving survey data undermines the fair play in the markets.”

The Institute for Supply Management teamed up with Thomson Reuters to also sell a kind of enhanced access to the results to a monthly survey of purchasing managers. For a price, they send out a special version of the report designed to be digested by computers and thus quickly trade-able. The Duetsche Borse sells a 3 minute early version of the Chicago Business Barometer for 2,000 euros a year.

Thomson Reuters says they sell the Consumer Confidence Index 2 seconds early version to help their customers make better informed trading and investment decisions. Seriously, that was their response.

Did you ever see the old Paul Newman and Robert Redford movie, “The Sting”? The basic idea was that they set up a guy to think he was hearing the real-time results of a horse race, when in fact, the results were a few minutes old. The guy bet on the race and lost. There's a sucker born every minute. Thank you Thomson Reuters, for helping make us all better educated suckers, or, I mean …, investors.

And finally, an idea whose time has come, or is actually long overdue, and probably has very little chance of success, but we have to talk about it. A bipartisan group of 4 senators that includes Elizabeth Warren and John McCain introduced an updated version of the Glass-Steagall Act today.

The new bill, which is also cosponsored by Sens. Maria Cantwell (D-Wash.) and Angus King (I-Maine), would require banks that accept federally insured deposits to focus on traditional lending and would bar them from engaging in risky securities trading. The separation between lending and trading was originally imposed in 1933 by the Glass-Steagall Act. The legislation introduced today would also bar banks that accept insured deposits from dealing swaps or operating hedge funds and private equity enterprises.

McCain voted for the 1999 Gramm-Leach-Bliley Act, which repealed Glass-Steagall, but he's come to his senses. Good for him. Even the folks who wrote the 1999 act have come to regret it. Not Phil Gramm, but the folks who wrote it from Citigroup. Quick history; in 1998 Citibank merged with Travelers. The new company combined commercial banking and insurance and investing in a one-stop shop. It was the largest merger in history at the time. One problem – it was illegal under the Glass Steagall Act of 1933. So, the folks at Citigroup lobbied and they lobbied hard, and they re-wrote the rules to suit their pocketbooks.

Last Summer, former CEO Sandy Weill said he had a change of heart about repealing Glass-Steagal.

In 2009, John Reed, the co-founder of Citigroup issued his regrets, saying: “ I would compartmentalize the banking industry for the same reason you compartmentalize ships. If you have a leak, the leak doesn't spread and sink the whole vessel. So generally speaking you'd have consumer banking separate trading bonds and equity.”

And then, 10 years after his treasonous deal, Reed tried to justify his greed, saying: “When you're running a company, you do what you think is right for stockholders. Right now I'm looking at this as a citizen.”

Apparently Citigroup management was forced to renounce citizenship as a requisite for employment.

Senator McCain issued a written statement today, saying: "Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world. Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits."

He's absolutely correct. Gamble all you want, just don't make me pay for your gambling losses. Unfortunately, the bill introduced today probably doesn't have much chance, because frankly the banks are still running Washington. They control the place.

Wednesday, July 25, 2012 -

Sandy Weill, Glass-Steagall, and Banksters on the Wrong Side of History
-by Sinclair Noe


DOW + 58 = 12,676
SPX -0.42 = 1337
NAS – 8 = 2854
10 YR YLD unch = 1.41
OIL +.61 = 90.67
GOLD + 23.70 = 1605.80
SILV +.38 = 27.44
PLAT + 15.00 = 1406.00


One story today. In 1993 Sandy Weill acquired Shearson Lehman; in quick order he also bought up Travelers Corp and Aetna Life and Casualty and then Salomon Brothers. He began calling the conglomerate, Travelers Group. In April 1998, Travelers Group announced an agreement to undertake the $76 billion merger between Travelers and Citicorp. The new company, called Citigroup, combined a commercial bank holding company with an insurance company and investment banking; it was a big one stop shop that included Citibank, Travelers, Smith Barney, Primerica, Citifinancial, Shearson, Aetna, and Salomon. At the time, it was the largest merger in history and created a financial behemoth with operations in 100 countries. It was also illegal based upon the Glass-Steagall Act of 1933.


Let's go back in time to explain Glass-Steagall. At the height of the Great Depression the Congress conducted hearings which showed that the presumed leaders of American enterprise, the bankers and brokers, were guilty of disreputable and dishonest dealings and gross misuses of the public's trust, literally buying control of politicians. The hearings started in 1932 and they uncovered plenty of abuses. JP Morgan maintained a “preferred list” of clients that would get special deals, huge discounts on stock purchases that could then be flipped for a quick profit. The preferred list included: former President Calvin Coolidge, Supreme Court Justice Owen J. Roberts, former head of the Democratic Party John Raskob, and diplomat Norman Davis. The bankers had truly bribed their way into control of government. 


J.P. Morgan, Jr., the son of the founder of the banking empire, testified that he had not paid any income taxes in 1930, 1931, and 1932; and dozens of multi-millionaire partners in JPMorgan had also not paid taxes. The revelation that the wealthiest American were not paying income tax must be juxtaposed against the desperate demands of the Bonus Army, the World War 1 veterans looking for their pensions, only to be turned away at the point of a gun by active troops led by Patton and MacArthur.


The hearings of 1932 ultimately led to reforms: “The Glass-Steagall Act was enacted to remedy the speculative abuses that infected commercial banking prior to the collapse of the stock market and the financial panic of 1929-1933. Many banks, especially national banks, not only invested heavily in the traditional sense of the term by buying original issues for public resale. Apart from the special problems confined to affiliation three well-defined evils were found to flow from the combination of investment and commercial banking.


The three evils were: 1) banks were investing their own assets in securities with consequent risk to commercial and savings deposits; 2) loans were made in order to shore up the price of securities or the financial position of companies in which a bank had invested its own assets; 3) and commercial banks' financial interest in the ownership, price, or distribution of securities inevitably tempted bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell because of its own stake in the transaction. 


The Glass-Steagall Act was one of the pillars of banking law since its passage in 1933. Glass-Steagall built a wall between commercial banking and investment banking. The law kept commercial banks that accept deposits from doing business on Wall Street as investment banks that issue and trade securities, and vice versa. Glass-Steagall is actually the Bank Act of 1933, which also included allowing the Truth in Securities Act and the Securities Exchange Act, which created the SEC; and also the FDIC to insure bank clients' deposits. The bankers had so thoroughly abused depositors' confidence that insured accounts were the only way to lure depositors back to banks; even then, millions of Americans would never trust banks again. 


The Bank Act of 1933 worked, all the way up until 1998 when Sandy Weill and John Reed illegally merged Citicorp and Travelers Group in direct violation of Glass-Steagall. So, they decided to change the law. They hired former President Gerald Ford and former Secretary of the Treasury Robert Rubin. Their lobbying efforts cost more than $300 million dollars and produced fast results. Senator Phil Gramm, who received almost $5 million in campaign donations, led the assault. Gramm would eventually become a high paid consultant for the Swiss bank, UBS. Treasury Secretary Robert Rubin, a former partner at Goldman Sachs and soon to be Director at Citigroup, also championed repeal of Glass-Steagall.


The Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999 , finally killed Glass-Steagall. The wall between commercial banks and investment banks was torn down. It did not take long for the financial behemoths to start making risky bets with depositors' money. 


The Commodity Futures Modernization Act of 2000 then provided the casino for the big banks to play; the act was written by lobbyists and co-sponsored by Phil Gramm and Richard Lugar. The Act was tacked onto thousands of pages of a budget bill in the final hours before a vote; it is doubtful any legislators read the complete Act before voting. The Act removed regulation on newfangled financial products called swaps and derivatives. According to Senator Gramm, the Act would “protect financial institutions from over-regulation” and “position our financial services industries to be world leaders into the new century.” What it did was to turn banks into a modern version of the bucket shops that caused the Panic of 1907. Banks were now allowed to place private bets, called derivatives, on underlying assets, such as commodities, securities, interest rates, or anything else they wanted to bet on. The bets were private and did not fall under the regulation of public exchanges. If the bets went bad, the banks could and would turn to the taxpayer for bailouts; and when the public grew weary of bailouts, the bankers used excess deposits, insured by the FDIC to place their bets.


The derivatives and swaps market has now grown to more than a quadrillion dollars. The GDP of the US is around $15 trillion; global GDP is about $55 trillion. To say that the banks are out of control is a huge understatement. 


In 2009, John Reed, co-founder of Citigroup came to regret the repeal of Glass-Steagall and his role in bribing politicians for the repeal. Reed said: “I would compartmentalize the banking industry for the same reason you compartmentalize ships. If you have a leak, the leak doesn't spread and sink the whole vessel. So generally speaking you'd have consumer banking separate from trading bonds and equity.” 


Ten years after his treasonous deal, Reed tried to justify his unfettered greed; he said: “When you're running a company, you do what you think is right for the stockholders. Right now I'm looking at this as a citizen.” Apparently Citigroup management must renounce citizenship as a requisite  for employment; or is it just to take their severance pay?


The real catalyst for repeal of Glass-Steagall was Sandy Weill. Weill went on to run Citigroup; where he financed such frauds as Worldcomm and Enron. For years Weill has denied that repeal played any role in the 2008 financial crisis, even as the House of Sandy failed in 2008 and required bailouts. 


Today, he appeared to change his mind. On CNBC this morning, Weill said: “What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail. I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable,” and "We should have banks do something that is not going to risk the taxpayer's dollars.”


Well, I hope the hypocrite burns in hell. He has done a terrible disservice to his country. We should not have listened to him in 1998. We should not listen to him now. It is unlikely his about face will have any impact. Still, it is an admission that the banking system is broken; an admission from one of the people who built that system. When Sandy Weill says the banks should be broken up, it's hard to make a case for the status quo. Clearly, after you strip away the golden parachutes and the bribery; and in the patina of time, the apologists for the banksters will all be proven to be on the wrong side of history.