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

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

by Sinclair Noe

DOW – 120 = 13,190
SPX – 13 = 1430

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BBVA: settled overdraft suit for $11.5 million.

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

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

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

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

Crédit Agricole: sued by CDO investors two times.

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

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

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

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

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

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

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

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

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

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

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

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

Thursday, December 20, 2012 - Plan B, Plan S

Plan B, Plan S

by Sinclair Noe

DOW + 59 = 13,311
SPX + 7 = 1443
NAS + 6 = 3050
10 YR YLD un = 1.80%
OIL -.03 = 89.95
GOLD – 18.70 = 1648.20
SILV – 1.06 = 30.02

I'm thinking we just go over the cliff. Why not? It looks more and more that they aren't going to get anything done. They say they are close, they say it is possible, but really, I don't have confidence.

President Obama held a press conference. And he said he had gone at least halfway in meeting some of the Republican concerns. At least halfway? So he's admitted that he's already met them in the middle, and likely gone past the middle into Republican territory. And we're still two weeks out from the fiscal cliff deadline, with Republicans sitting around waiting for the inevitable further concessions Obama will make. Why didn't Obama say something like, "I made a more than fair deal. The GOP rejected it. So now I'm pulling the offer off the table and waiting to see what the GOP has to offer. Clock's ticking!" Instead, the GOP will bank the concessions he's already made, then demand more. Rinse. Lather. Repeat.

Meanwhile, Speaker John Boehner is just playing with himself. He's offered up a Plan B for a vote in the House. One of the touted benefits of "Plan B" is that it only raises taxes for those making $1 million or more. Eric Cantor said this morning, the plan would raise revenue "without hurting many small businesses" or taxpayers. Not exactly.

But a closer look at the tax impacts of Plan B shows that while it raises taxes on most million-plus earners, it also raises taxes for many low-income earners. The non-partisan Tax Policy Center found that the average taxpayer earning $1 million or more in cash income would see their taxes go up by an average of $72,000. A small number of those million-plus earners will see a tax cut, due to an anomaly in the Alternative Minimum Tax.

But lower income earners will also see a tax hike. People making between $10,000 to $20,000 will see their taxes go up by an average of $262. People making $20,000 to $30,000 will see their taxes go up by $219. Some of those low-income earners could see a sizable increase. One in five of Americans who earn less than $20,000 a year will see an increase of $1,070 -- a sizeable amount for low-income earners.

In fact, the only taxpayers who will get an overall tax cut under Plan B are those who earn between $200,000 and $1 million. People making between $200,000 and $500,000 will see an average tax cut of $301. Those making between $500,000 and $1 million will see their taxes go down by $164.

The reason is that Plan B has two parts; raising taxes on high earners and eliminating deductions for low earners. The plan raises the tax rate for those making $1 million or more to 39.6 percent from its current rate of 35 percent. It would also raise the capital gains and dividend tax rates for those earners to 20 percent from 15 percent. Plan B also eliminates many of the Obama-led tax credits that largely benefit low-income earners, including the 2009 enhancements to the child tax credit, the earned income tax credit and others.

Which is just another way of saying that Boehner is playing games because he knows that Plan B will never get through the Senate and never get signed into law. Apparently, it is nothing more than an effort to show some Republicans are willing to stand up to Grover Norquist and vote for a tax increase, for everybody not earning between $200,000 and $1 million; which is something that is so far out of the mainstream conversation that it is absurd. The Democratic leader in the Senate, Harry Reid, at an earlier press conference, said the bill was an empty gesture: "We are not taking up any of the things that they're working on over there now. It's very, very, very unfortunate the Republicans have wasted an entire week on a number of pointless political stunts. The bill has no future, if they don't know it now, tell them what I said.”

The impasse comes at a time when the differences between Obama and Boehner appear to be minimal, with agreement reached on principle and divided only over the final figures. Obama wants the tax increases to kick in at $250,000 rather than $1 million. He is proposing $800 billion in spending cuts whereas Boehner is looking for $1.2 trillion.

Claiming it was not about the figures,Democrats identified the problem as Boehner being unable to deliver Republicans behind a tax-raising measure, and that is probably the reason for the crazy Plan B vote. It might just be a way to measure how everybody might be expected to vote, you know, in a real vote.

Hong Kong financial authorities are investigating Swiss bank, UBS over possible misconduct related to the Hibor, the Hong Kong benchmark interest rate.

Th Hong Kong Monetary Authoritym the city's de facto central bank said on its website that it has launched a probe to determine whether there was any wrongdoing by UBS when it submitted information used to set the Hong Kong Interbank Offered Rate. It will also try to find out if the misconduct had any "material impact" on setting the Hibor rate.

Everyone who has ever claimed that the financial industry is overregulated should be forced to read the United Kingdom's Financial Services Authority final notice on UBS's manipulation of the London interbank offered rate.

UBS disclosed cooperation with antitrust authorities more than a year ago, so it's no surprise that the bank was penalized, though the $1.5 billion penalty was nothing more than the cost of doing business, particularly because UBS had been granted leniency or some parts of the Libor probe. What's most striking about the FSA's filing on UBS is the brazenness of the reported misconduct. According to the FSA, 17 different people at UBS, including four managers, were involved in almost 2,000 requests to manipulate the reporting of interbank borrowing rates for Japanese yen. More than 1,000 of those requests were made to brokers in an attempt to manipulate the rates reported by other banks on the Libor panel.

According to the FSA, the bank's rate manipulation, whether to improve UBS's trading positions or to protect the bank's image, was so endemic that one employee who was supposed to submit rates complained in 2007 of being caught between demands by two different traders who wanted two different fake submissions. "I got to say this is majorly frustrating that those guys can give us s*** as mu c h as they like.... One guy wants us to do one thing and (the other) wants us to do another," he told a UBS manager, according to the FSA. Even after The Wall Street Journal first broke news of suspected Libor manipulation in 2008, UBS managers discussed continuing their rate-rigging, this time with the goal of staying in the middle of the pack of rate reports so it would look as though they weren't engaged in rigging.

The New York Stock Exchange has agreed to an $8.2bn takeover that will hand control of the icon of American capitalism to an Atlanta-based energy trader.

The stock exchange's holding company, NYSE Euronext, has agreed to an offer of $33.12 a share in cash and stock from IntercontinentalExchange (ICE). ICE was founded in 2000, NYSE in 1817. The combined company would have headquarters in both ICE's home of Atlanta and in New York.

The National Association of Realtors reportes sales of existing homes rose 5.9% in November to a seasonally adjusted annual rate of 5.04 million, reaching the highest rate since November 2009, when a tax credit was expected to expire.

First-time claims for unemployment benefits climbed 17,000 in the latest week, that's a level that suggests the labor market is continuing its steady but painfully slow improvement.

The US economy grew more quickly than previously stated in the July-to-September quarter due to stronger trade, faster health-care spending and increased local government construction. The Commerce Department said third-quarter gross domestic product grew at a seasonally adjusted annual rate of 3.1% in the third quarter, which is the fastest rate of growth since the 4.1% pickup in the final quarter of 2011.

Personal consumption is now pegged to have grown at a 1.6% rate, up from a previously estimated 1.4% rate and faster than the 1.5% advance in the second quarter. The change from the previous estimate was due to an upward revision to health-care services, and the growth during the quarter came from durable-goods spending on vehicles.

Other differences between the third-quarter reports: Trade was a bigger help, with exports 0.8 percentage point higher due to revised export prices as well as more goods, and imports 0.7 percentage point lower due to downward revisions to travel and to royalties and license fees.

Government spending also was stronger than previously estimated, showing 3.9% instead of 3.5% growth, due to local and state government construction. The big increase in government spending during the third quarter is expected to be a one-time affair, driven by a temporary surge in defense maintenance costs. Business investment was a drag in the third quarter, dropping by 1.8%. So, now we know what the economy did five months ago.

The Treasury has announced plans to get out of General Motors."GM will purchase 200 million shares of GM common shares from Treasury for $27.50 per share" translates into news reports as “Treasury will lose a gazillion dollars on GM Deal” since after all Treasury paid rather more than $27.50 per share originally, but there are other ways to look at it. One is that Treasury seems to have agreed a deal with GM after the 12/18 close at $27.50 for a stock that had closed at $25.49 and hasn’t touched $27 in ten months; in other words, GM overpaid for stock by $400 million.

Here's the official explanation: GM’s repurchase will be accretive to earnings per share, reducing the auto maker’s total shares outstanding by about 11%. GM expects to take a charge of approximately $400 million in the fourth quarter, which will be treated as a special item.

Getting rid of shares reduces shares outstanding and is accretive to EPS. It’s somewhat less accretive when you overpay for the shares by $400 million and that $400 million is a charge to income. But at least you can call it a special item. Isn't that how all of us do our tax returns?