Monday, February 04, 2013 - Brouhaha As Excuse

Brouhaha As Excuse

by Sinclair Noe

DOW – 129 = 13,880
SPX – 17 = 1495
NAS – 47 = 3131
10 YR YLD - .04 = 1.97%
OIL – 1.61 = 96.16
GOLD + 6.80 = 1675.40
SILV - .08 = 31.86

With all the brouhaha over the fiscal cliff and the debt ceiling and the inauguration and the Super Blackout, it would be easy to forget the problems in Euro-land, but today, those problems have jumped back onto center stage, again. In Italy and Spain the prospects of stable government are slipping.

First in Italy, an election is scheduled for later in the month. The technocrat-slash-PM Mario Monti will exit, stage right, and the race is on. The second and third place contenders are a comedian named Beppe Grillo and another comedian, Silvio “Bunga-Bunga” Berlusconi; it appears unlikely either will win, but they are looking like they can splinter the vote for front-runner Pier Luigi Bersani. The running theme of the campaigns is anti-austerity and anti-German authoritarianism.

In Spain, the economy is contracting, again. Fourth quarter GDP shrank by 0.7%; the steepest decline in more than 3 years. Also, last week a new report showed unemployment at more than 26% in the fourth quarter. They are still calling it a recession but it is clearly a depression, and it is exacerbated by spending cuts and tax increases. Toss in a slush fund scandal involving the Prime Minister Rajoy, alleging kickbacks from construction firms; add in the Catalonian secessionist movement, and massive street protests.

Italian and Spanish bond yields jumped higher today. Implied default probabilities in Italy and Spain that were at 50 percent last July are still as high as 20 percent.

Toss in a $3 billion dollar fourth quarter loss for Deutsche Bank, and similar writedowns for Credit Agricole, the number 3 French bank; and last week the Dutch government nationalized the fourth largest bank in the Netherlands. The banks are still a weak link in any Euro-recovery. They haven't written off enough of their losses; they continue to hold toxic assets; they have tightened lending as capital gets swallowed up in the black hole of their impaired balance sheets.

Meanwhile, Royal Bank of Scottland is expected to announce tomorrow that has a settlement agreement with US and British authorities to pay $780 million in fines for manipulating Libor, the London Interbank Offered Rate, which is the key benchmark for interest rates.

Today, the British finance minister announced plans for what they are calling an electric ring fence around retail banks. The idea is to break up British banks that fail to guard their day-to-day banking from risky investment activity. The idea is that there would be repercussions to mixing deposits with the gambling money. We used to have a law that prevented those problems. It was called Glass-Steagall, and the Brits are slowly returning to the wisdom of that separation. And in announcing the new regulations, the British head of the Exchequer, George Osborne, (no relation to Ozzy), said: “America and elsewhere, banks found ways to undermine and get around the rules.” In the U.S., three out of the four biggest banks are bigger than they were before the financial crisis. Which is true, but he failed to mention that in the US and Europe, the big banks get bigger and bigger and operate with impunity from prosecution for things like Libor rate rigging or money laundering.

This is not to say that US banks have it easy. According to Brian Moynihan, the CEO of Bank of America, the acquisition of Countrywide was like climbing a mountain with a “250-pound backpack.” An article in the NY Times over the weekend says that so far, BofA has set aside some $40 billion to settle claims of mortgage misconduct that occurred before it acquired the fast and loose Countrywide. And to hear BofA tell it, all those bad mortgages sprang from the muddy waters of Countrywide. But according to documents from three Federal Home Loan Banks and a state Supreme Court in Manhattan, BofA continued shoddy mortgage practices well after the Countrywide acquisition.

Among the new details in the filing are those showing that Bank of America failed to buy back troubled mortgages in full once it had lowered the payments and principal on the loans — an apparent violation of its agreements with investors who bought the securities that held the mortgages.

The filings show that Bank of America had modified more than 134,000 loans in such securities with a total principal balance of $32 billion. Even as the bank’s loan modifications imposed heavy losses on investors in these securities, Bank of America did not reduce the principal on second mortgages it owned on the same properties. The owner of a home equity line of credit is typically required to take a loss before the holder of a first mortgage. By slashing the amount the borrower owes on the first mortgage, Bank of America increases the potential for full repayment of its home equity line. Bank of America carried $116 billion in its home equity loans on its books at the end of the third quarter of 2012.

This new information is part of a suit that alleges BofA's $8.5 billion dollar settlement of shady mortgage practices back in the summer of 2011, that settlement was letting BofA off far too easy (about 2 cents on the dollar), and it was made without proper analysis of all the wrongdoing by BofA. So, the acquisition of Countrywide offered BofA a scape goat, an excuse for nasty behavior. The only problem is that they kept running things the same way as Countrywide.

Meanwhile, the Justice Department, along with state prosecutors, plans to file civil charges against Standard & Poor's Ratings Service, accusing the firm of fraudulently rating mortgage bonds that led to the financial crisis. A suit against S&P would be the first the government has brought against the credit ratings agencies related to the financial crisis. Up until last last week, the Justice Department had been in settlement talks with S&P, but negotiations broke down after the Justice Department said it would seek a settlement in excess of “10 figures,” or at least $1 billion, essentially wiping out a full year of profits for the S&P parent company, McGraw Hill.

During settlement negotiations, the Justice Department held out the threat of a criminal case against S&P. Ultimately, the government plans to bring a civil suit, which has a lower burden of proof than a criminal case. And we all know the Justice Department hates to work hard to insure fair and equal justice under the law.

So you're probably saying: “Hey, this whole Euro-zone dysfunction is nothing new. So what if another Euro-bank gets fined for being sleazy scum bags? So what if there's a corruption scandal in Spain? So what if I haven't even mentioned Greece or Cyprus? So what if the austerity measures are grinding the life out of the Euro-economy like a jack-boot on the throat? What does all that have to do with a downturn in the US stock market?

And the answer is – it's a good excuse.

We have a couple of big, juicy round numbers serving as resistance; the Dow is staring down 14,000 and the S&P is pushing 1500. And then we have record highs to consider. And then we have to pause and consider that the move in January looked nearly parabolic. And that forces us to ask some questions. Has the economy actually improved? Can the average investor continue to ignore stocks or can the markets find greater fools to step up to the plate and donate their money?

Why worry; the markets always go up; except when they don't.

With the stock market up more than 100 percent from those scary days in early 2009, it seems we’re in danger of repeating the same old cycle of swearing off stocks forever during scary markets, missing a huge rally and then deciding it’s time to buy when stocks are high again. Or maybe it's time to sell. Actually, the thing to do right now is to make sure you have a plan in place which covers scenarios such as February 2013, and probably the first question to be answered when creating a plan is: Why are you investing this money in the first place?

And what this really tells us is that the US and Euro-zone economies are a bit stronger and more resilient than than we imagine. And when black swan events are predicted and discussed, they rarely happen; they are instead avoided.

The Energy Information Administration says Americans spent a record amount on gasoline last year, with more of their income going toward motor fuel costs than at any time since the 1980s. The average household expenditure on gasoline hit $2,912 in 2012, or just under 4 percent of pre-tax income, as higher prices at the pump canceled out the effect of more efficient vehicles.

This was the highest estimated percentage of household income spent on gasoline in nearly three decades, with the exception of 2008. The previous record amount was just below $2,750 in 2008, as crude oil prices spiked toward $150 a barrel in the first half of 2012. Global crude oil prices averaged around $111 in 2011 and 2012. The average cost of a gallon of gasoline in U.S. cities was $3.70 last year, up more than 30 percent since 2010. And although prices are down from 12 months ago, prices are moving higher; up 4 cents last Friday alone.

On February 3, 1913, the 16th Amendment to the Constitution was ratified; the reason that's important is because it marks 100 years of federal income tax.

And finally, there's one thing I think we all learned from yesterday's Super Bowl: don't forget to pay your electric bill on time. 

Tuesday, December 11, 2012 - If Banks Could Kill They Probably Will

If Banks Could Kill They Probably Will

by Sinclair Noe

DOW + 78 = 13,248
SPX + 9 = 1427
NAS + 35 = 3022
10YR YLD +.03 = 1.65%
OIL +.09 = 85.65
GOLD – 2.20 = 1711.40
SILV - .27 = 33.10

If all goes according to plan, in about 13 days, a star will rise in the east somewhere over Washington DC, signaling the birth of a new budget deal. If you're waiting for three wise men, don't hold your breath, because they couldn't find them in our nation's capitol. With just days to go before the nation slides down the fiscal Cliff Clavin of tax increases and spending cuts mandated by our confederacy of dunces to take effect with the passing of the arbitrary date on a calendar, there are signs that a deal to avoid the slide is near.

Pert' near every reporter in Washington says a deal is imminent. Just this Sunday, Obama and Boehner met in secret, well, not exactly a secret, and they did something, maybe they came up with a deal, maybe they barbequed some brats and watched some football, but their silence on the subject speaks volumes. Their silence almost provides proof positive that a bipartisan deal must be something that might have possibly been a part of the silent conversation, or not; but hey, it looks like a deal, except for all those pesky details. And it only took two years, possibly, of unnecessary uncertainty and sovereign debt downgrades to hammer out an agreement to whup the economy upside the head with a two by four without totally destroying it, rather than figuring out a way to grow the economy. Hallelujah, we have something that might be close to a deal, but nobody is saying anything.

Meanwhile, the Fed is meeting to consider monetary policy; and you never know what those wild and crazy guys will come up with. Meanwhile, the Treasury Department is dusting off its book of magic monetary incantations which includes “extraordinary measures” in the event the politicians do a lemming imitation and run off the cliff, and fail to come to a consensus on the debt ceiling, which means paying the bill for money already spent. The extraordinary measures would allow the Treasury to continue to send out checks for things like Social Security, military salaries and other payments. The U.S. was about $67 billion under the $16.394 trillion debt ceiling as of Friday. That’s small change in a world of trillion-dollar deficits and billions in monthly borrowing.

Treasury expects to bump up against the cap, which is set by Congress, very near the end of this month. Lawmakers may not raise it before then — the debt limit has become entangled in fiscal cliff talks. The White House wants to be able to raise the debt ceiling without political drama, though Republicans see their authority over the cap as a crucial bargaining chip. So, the Treasury could play with the numbers and some bonds and keep the government open for a few weeks. After that, who knows? Maybe the government will have to force PBS to fire Big Bird. Maybe the government could shorten the workweek for the Coast Guard; you know, an unpaid furlough. Maybe, they could raise the cost of a fishing license to $50,000. I know some people who would pay. Maybe they could get a loan from a big insurance company.

The Treasury Department says it plans to sell its last remaining shares in AIG, the insurance giant that would have toppled in 2008 without a federal takeover. Washington essentially nationalized AIG in a fit of financial panic, out of fear that AIG's collapse would have taken much of the financial system with it. Instead, the government committed $182 billion to AIG, making it the largest bailout of any single company. The General Motors bailout, at about $52 billion, cost less than one-third what the feds provided to AIG. Treasury expects the government to earn a net profit of $22.7 billion on the AIG bailout, once it sells its remaining shares. That amounts to roughly a 3 percent annual return

The ugliest part of the AIG bailout was the discovery in 2009 that $62 billion in taxpayer funds disbursed to AIG ultimately went to big banks that had contracts with AIG, including Goldman Sachs, Merrill Lynch, Bank of America and even a few foreign firms. They paid off AIG trading partners at 100 cents on the dollar, when those same partners would have gotten a fraction of that amount if AIG had declared bankruptcy. This is when we learned the great untold secret about AIG; it isn't really an insurance company; no self-respecting insurance company would ever pay 100 cents on the dollar for any claims. Instead, we learned that AIG was just a conduit to funnel taxpayer money from Washington to Wall Street.

But, hey, the deal was done, and now the Treasury can sell a few more shares and turn a profit. All's well that ends well.

Not exactly.

Nearly one-third of the AIG stock that the Treasury is selling came from the Federal Reserve, not from the Treasury's bailout program. Plus, there was a little side deal that was a part of the bailout that gives AIG a waiver on billions in future tax payments. I'm not saying I wanted to see AIG destroyed, but it was painful to see the bailout and then the lavish bonuses, and to never see anybody from AIG go to jail for anything. We shoulda had at least one perp walk for our money. But, a global financial meltdown was averted and it won't happen again..., because, umm...., because maybe we'll get lucky next time?

Right now, the Federal Reserve is regulating AIG because AIG owns a small bank, but AIG is planning to sell the bank, and when that is done there will be no government regulator of AIG's non-insurance financial activities, which was the problem that almost destroyed AIG. There may be one option; if the Fed declares AIG to be a systemically important financial institution, then they would continue to be regulated, presumably.

Of course, systemically important financial institution is just another way of saying too big to fail, which is another way of saying too big to jail. Case in point; HSBC. The Treasury Department notes that HSBC allowed “hundreds of millions of dollars” from Mexican drug trafficking organizations to flow though accounts in the U.S” even though the bank had “substantial resources” to limit money-laundering risks.

Specifically, $881 million in drug trafficking proceeds by the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Columbia were laundered through HSBC’s U.S. unit without being detected by the bank. The British banking giant had to pay a $1.9 billion dollar fine for money laundering with Iranians, Mexican drug cartels and such; it sounds like a lot of money, but it's really like a traffic ticket for you or me.

Today, the NY Times quotes anonymous government officials who say they were skittish about indicting HSBC because formal charges would amount to a "death penalty" for the bank, potentially roiling the financial system. Which reminds me of a quaint old saying: “With liberty and justice for all,” or maybe it was “equal protection under the law,” or some such nonsense because if you are a big bank, the law does not apply.

Not a single HSBC individual faces criminal prosecution. Nor have any individuals been charged at the five other big European banks that have also managed to dodge formal money-laundering charges in recent years, including British bank Standard Chartered, which entered its own deferred prosecution agreement on Monday. Apparently, all of this constant money laundering was done by robots.

The message is clear, if you are going to launder money to terrorists and drug cartels, do it under the protective umbrella of a large bank, because apparently the government is afraid of the big bad banks. And that means that if you are a bank and you're big enough, you're basically going to get away with creating and selling toxic securities while also betting against them and trigger a global depression without having to worry about doing any jail time. If you are part of a big bank you can get away with everything short of murder. Bankers can't actually murder people, all they can do is launder dirty money for terrorists and drug cartels which do the actual murdering. It's a technicality, but it is worth noting.

Meanwhile, Italy is still Italy. Over the weekend, Italian Prime Minister-slash-technocrat-slash-commisar, decided to resign. There was great wringing of hands and gnashing of teeth; how could Italy survive? Worse still, would former Italian Prime Minister Silvio Berlusconi rise up from his bunga bunga bed to make a run at the post? Would Monti's resignation usher in an era of instability in Europe's third largest economy? Which is a little crazy considering the unemployment, and protests, and riots, and instability throughout much of Euro-land, including Italy.

New figures out this week showed Italy’s gross domestic product down 2.4% from the year-ago period — the fifth quarterly decline in a row; and industrial production off 1.1% in October from the previous month, the 14th consecutive monthly decline. Under Monti, unemployment in Italy has risen to more than 11% and youth unemployment tops 36%, with countless more young Italians leaving the country for better opportunities elsewhere.

The austerity policies, designed to reduce the deficit by raising taxes and reducing government spending, are having trouble reaching their deficit targets because the GDP keeps falling, and so the debt to GDP ratio grows, even as spending is cut to the bone. Italy’s debt-to-GDP ratio has swollen to an estimated 126% this year. So, most of the politicians that are thinking about running for Prime Minister have pretty much fallen in line with the Euro-powers-that-be in Brussels. And Italian voters who have lived with an unelected government for the past year will soon have a choice of pre-approved candidates. Let's hope they choose wisely.

According to the Public Company Accounting Oversight Board, the nation's top accounting regulator, accounting firms have a problem with actual accounting. The PCAOB report released yesterday "said the eight biggest accounting firms failed in 22% of the audits it reviewed last year to gather enough evidence to support opinions issued by the firms that claimed a company's internal controls were effective."

Actually, that explains a lot.