Monday, June 25, 2012 - Spain and Cyprus Fall - US Banks Insure Bets - Goldman Behaves Badly - Congressional Insider Trading - by Sinclair Noe

DOW – 138 = 12,502
SPX – 21 = 1313
NAS – 56 = 2836
10 YR YLD -.06 = 1.61%
OIL -.06 = 79.15
GOLD + 13.00 = 1585.30
SILV +.64 = 27.64
PLAT + 9.00 = 1450.00


So, the good news is that the Dow only dropped 138.


It could have been worse; or better, depending on your perspective. Back in April we advised heeding the old advice to sell in May and stay away. May was a horrible month. The first couple of weeks in June, we bounced back just a little, then we continue the declines.


This Euro-problem just never dies. There will be another emergency two day Euro-summit starting Thursday.  This appears to be the one area of relentless growth in Europe – the emergency summit business. I'm guessing that the caterers and event planners in Brussels are posting nifty profits. Expectations are low after Germany resisted pressure for common euro zone bonds or a flexible use of Europe's rescue funds at a meeting of the region's four biggest economies last week. Austerity measures pushed forward by Germany have tested the patience of the Greeks. The Greek government had to begin a search for a new finance minister after the nominee for the post said he could not serve because of health reasons. The situation in Greece sometimes seems it is never-ending. 


Cyprus announced it was seeking a bailout for its banks and its budget. Cyprus joins Greece, Ireland, Portugal and Spain in seeking EU rescue funds, meaning more than a quarter of the 17 euro zone members are now in the bloc's emergency ward. Italy's funding costs have soared too, which means it could be next. 


 Cyprus suffered a further sovereign credit rating cut on Monday by Fitch, to the junk BB+ grade. It is already shut out from raising new funds on capital markets, with yields on existing bonds well into double digits.  An island with just 1 million residents, Cyprus has a disproportionately large financial sector that is heavily exposed to Greece, a neighbor more than 10 times the size with which it shares a language, culture and close political links. Cyprus will find the bailout money. The reason? A few months back they found huge deposits of natural gas. 


Meanwhile, Spain is running on fumes. Moody's Investors Service downgraded the long-term debt and deposit ratings for 28 Spanish banks and two issuer ratings, following on the heels of a cut to Spain's sovereign rating to just above junk status earlier this month. Spain formally submitted its request for up to 100 billion euros of funds to bail out its banks, agreed on June 9. Spanish government bonds came under pressure with the 10-year bond yield up almost 30 basis points at 6.64 percent, near the 7-percent mark that forced other indebted European countries to ask for bailouts. 






Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America and Citigroup all suffered credit ratings cuts on Thursday. The rating agency Moody’s Investors Service said the banks had moved to strengthen their operations, but their core trading businesses contained structural weaknesses. And some of the problems that lead to the credit downgrades may actually be exacerbated by the cuts. 


One of those trouble spots is short-term borrowing. Wall Street firms need to finance their operations at a low cost to make profits, so they make heavy use of short-term loans that last from a few days to a few months; the downgrades could push up the costs of these loans. 


Another trouble spot is their derivatives business. Derivatives can be a lucrative for banks, but derivatives clients, to protect themselves, may now demand better terms with downgraded banks, like increased collateral. A derivative is less appealing when the counterparty looks weak. Wall Street banks would then have to decide whether to give up the business, or go along with client demands and face weaker profits. Some banks may have to relax their terms in order to win business.


To help insulate their profits from a downgrade, many Wall Street banks locate derivatives trades in bank subsidiaries backed by government-insured deposits. So, the units that took the risks messed it up so bad that their credit rating is cut, the banks just shift the risk of bets in derivatives over to the FDIC insured side of the ledger, and since they are FDIC insured, these subsidiaries have higher credit ratings than the parent companies. Citigroup, Bank of America and JPMorgan Chase have more than 90 percent of their derivatives in such subsidiaries. Morgan Stanley only has 5 percent. 


Incredibly, there has been very little mention of this by the bank regulators. I think the FDIC should be screaming bloody murder, but they are not. The banks are now lumping together massive bets on derivatives with deposits from widows and orphans, and if the bets fail (and really given enough time, all gamblers are bound to hit a losing hand), when the bets fail, the first payoff comes to the gamblers. You may not want a bank bailout, but you probably want to guarantee FDIC insured deposits. This is the banksters sneaky new backdoor bailout. You've been warned.


Moody’s didn’t warn of possible future downgrades for these bank holding subsidiaries, but it did say the parent companies had a negative outlook, the agency’s way of saying it still had doubts about their creditworthiness. Given that threat, the banks may try to do as much business as they can in these higher-rated subsidiaries. That could face resistance from regulators, if the regulators ever wake up and smell the rot. 




Goldman Sachs lost a bid to dismiss a shareholder lawsuit alleging it made material misstatements in its own securities filings about its conflicts of interest in several complex securities transactions, including the now-infamous Abacus 2007 deal.


Every now and then a Judge wakes up and sees the light, and so we must say hallelujah and recognize a new convert: In a 27-page opinion, Hon. Paul Crotty of the U.S. District Court in the Southern District of New York said the shareholders, led by the Arkansas Teacher Retirement System and other pensions, sufficiently argued that Goldman made material misstatements about its business practices and conflicts in its roles in collateralized debt obligations like Abacus, and similar deals named Hudson, Anderson and Timberwolf.


Goldman’s arguments are “Orwellian,” the judge wrote in the opinion. “Words such as ‘honesty,’ ‘integrity,’ and ‘fair dealing’ apparently do not mean what they say; they do not set standards; they are mere shibboleths.”


At issue are disclosures in Goldman’s annual securities filings and its annual report related to how it addresses conflicts of interest, and more generally, how it conducts its business, including a line that it is dedicated to complying with the letter and spirit of the laws. Fraudulent conduct hurts a company’s share price, the judge wrote in his opinion; and concealing such conduct caused Goldman’s stock to trade at artificially high prices, the opinion said.


A spokesman for Goldman declined to comment.


In the Abacus deal, for which Goldman paid a $550 million SEC enforcement settlement two years ago, Goldman allegedly allowed hedge fund Paulson & Co. to select assets for the security that would perform badly or fail and hid the hedge fund’s role from investors.  In the Anderson, Hudson and Timberwolf 1 deals, Goldman said it held a long position in the equity portions without disclosing its substantial short positions in each, the shareholders allege.


The judge wrote that the shareholders have plausibly argued that Goldman knew its statements about holding long positions and being aligned with investors were inaccurate because of its substantial short positions. The judge also wrote: “If Goldman’s claim of ‘honesty’ and ‘integrity’ are simply puffery, the world of finance  may be in more trouble than we recognize.”




A new investigation from the Washington Post reveals 130 members of Congress or their families have traded stocks collectively worth hundreds of millions of dollars in companies lobbying on bills that came before their committees, a practice that is permitted under current ethics rules.


The lawmakers bought and sold a total of between $85 million and $218 million in 323 companies registered to lobby on legislation that appeared before them, according to an examination of all 45,000 individual congressional stock transactions contained in computerized financial disclosure data from 2007 to 2010.


Almost one in every eight trades — 5,531 — intersected with legislation. The 130 lawmakers traded stocks or bonds in companies as bills passed through their committees or while Congress was still considering the legislation. The party affiliation of the lawmakers was almost evenly split between Democrats and Republicans.


Earlier this year, Congress responded to criticism of potential conflicts of interest by passing the Stock Act, which bars lawmakers, their staffs and top executive branch officials from trading on inside information acquired on Capitol Hill; but the act failed to address the most elemental difference between Congress and the other branches of government: Congress forbids top administration officials, for instance, from trading stocks in industries they oversee and can influence. The lawmakers, by contrast, can still invest in firms even as they create laws that can affect the bottom line of the companies.


It sounds like common sense and basic propriety that if you have major responsibility for drafting legislation that directly affects particular companies, then you shouldn’t be trading in their stock. Your wife isn’t a blind trust. Your financial adviser isn’t either. At some point the lawmakers need to learn how to just say no.

Thursday, June 21, 2012 – Like Crack for Bankers – by Sinclair Noe

DOW – 250 = 12,573
SPX – 30 = 1325
NAS – 71 = 2859
10 YR YLD - .02 = 1.62%
OIL – 3.20 = 78.25
GOLD – 41.60 = 1566.20
SILV – 1.24 = 26.98
PLAT – 19.00 = 1445.00


Here is the bottom line on today's declines; Wall Street has become addicted to free money from the Federal Reserve. Stimulus from the Fed is like crack for the Wall Street bankers. Yesterday, the Fed refused to pass out more free money. Today, Wall Street got a bad case of the shakes.


One of the concerns when Bernanke and pals fail to act is that they can't really think of anything they might do that would have any real effect, or maybe they're satisfied with 2% inflation and 8.2% unemployment. So what if Bernanke doesn't have any more ammo?


Then we are left to the devices of fiscal policy, in other words; what can the politicians in Washington do to stimulate the economy? The most likely answer is that the politicians can drive the economy over a cliff. While that might seem cynical, it's really just pragmatic. 


And then, of course there is the Lehman Brothers event with subtitles looming in Europe. If Europe collapses, the thinking is that Bernanke will find a few more bullets in the form of QE3, and he will once again toss money at the Wall Street bankers. The Wall Street crack whores will fire up their pipes and place “risk-on” trades with the certainty that the Fed will place a put against any losses. The problem with this scenario is that Wall Street won't be ready to go risk-on in the event of a Euro-collapse, they'll just hoard the money and arbitrage against the Fed. 


And the bigger problem is that QE3 won't find its way into the broader economy; at least if past performance is any indicator of future results. QE1&2 were abysmal failures for Main Street. The money never went out into the broader economy and never developed any velocity; Operation Twist might have pushed down long term interest rates but it didn't make it easier to get an actual lower rate on your mortgage – that involved fiscal policy and it has be less than satisfying. the money was sucked into that black hole of bad bankster bets; and the banksters can bet more than Main Street can ever produce. 


If you forget your history, you can just refer to the playbook as it is happening right now in Europe. A new audit shows Spain's banks would need $64 to $78 billion in extra capital tow survive a serious downturn in the economy, less than the $125 billion aid package offered by the Euro-zone, but far more than the $$27 billion actually allocated for the ESM bailout fund, which has not yet been funded. Spain said it will make a formal request in the next few days but details on how much each bank will need won't be known until September. The important point here is that  the money is not going to the Avenida Central, it doesn't create jobs to alleviate the 25% unemployment rate in Spain; the money goes to the banks, and it disappears. Spanish banks need a $64 to $78 billion dollar bailout – for now. How long do you think it will take before they come back and demand more?


I read recently that the bailout money already sent to Greece is more than the amount Germany received under the Marshall Plan. That's an alarming statement, except Greece didn't receive the bailout money; it went to the banks. They didn't build roads and bridges and factories. And it is wrong to imagine Germany can bail out the Euro. The crisis has engulfed three small countries – Greece, Ireland and Portugal – and is now on its way towards Spain and Italy. France might well be next. These six countries’ public debts amount to 200% of German GDP. With its own debt of 80% of GDP, Germany can't stop the inevitable.


It's important to understand which countries were fiscally reckless. In 2007, Greece and Italy both had high debt to GDP (over 100%), Portugal, France and Germany had debt to GDP of a little more than 60%; Spain was in the 30% range; Ireland in the 20% range. The numbers should prove that the crisis is not a debt crisis but a banking crisis. The Greek bailout was a banking bailout and several of the banks were from France and Germany and even the US. 


Here in the United States we bailed out the banks to the tune of hundreds of billions and a couple of rounds of QE and the Twist and we still have big problems. Bernanke claims he still has some ammo left. Maybe he is holding it for a Euro-collapse but while he's waiting the US economy might go over the monetary cliff and he'll figure the only thing to do is another round of QE. Maybe the mistake the banksters really made was to have a pleasant little Wall Street rally to start the month of June; maybe Bernanke, in a flash of probity, didn't feel comfy passing out free money during a rally. Maybe he knows that after QE3 he really is running out of bullets.


Moody’s Investors Service downgraded the debt ratings of 15 major international banks and securities firms after the close of trade. The downgraded banks include: Bank of America, Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley, Royal Bank of Canada, Deutsche Bank, BNP Paribas, Credit Suisse, RBS, HSBC, and Barclays. Morgan Stanley and UBS each took a two-notch cut, not as bad as anticipated. Credit Suisse took a three-notch cut. The downgrades may affect derivatives that aren’t centrally cleared, some policies require the counter-party to maintain an A-rating. The downgrades also may hasten obligations to post additional collateral and termination payments. Moody's said: “All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital-markets activities.”In after hours, Morgan Stanley moved higher because the hit could have been worse. Is this the canary in the coalmine? It's hard to imagine the financials don't take a hit.


The global economy is slowing.  In China, the preliminary HSBC manufacturing purchasing managers’ index dropped to 48.1, the eight straight month of contraction. In Europe, the flash manufacturing PMI fell to 44.8, the lowest in three years. In the US, the flash manufacturing PMI remained in positive ground at 52.9, but the pace of the expansion in the factory sector slowed from May. The Philadelphia Fed said its manufacturing index plunged to negative 16.6 in June. Sales of existing homes dropped 1.5% in May. Oil prices down below $80 is a clear indication of a slowing economy. The number of Americans who applied for unemployment benefits fell slightly last week but remained at a level indicating virtually no improvement in hiring trends or labor market conditions.


It wasn't total gloomy economic news; the index of leading indicators rose 0.3% in May; the FHFA house price index inched up 0.8%; the data points toward a slowing economy, grinding lower without severe contraction. 


There are plenty of reasons we can attribute to today's declines, if you need a motive to deal with the move, pick one and wallow in it. We'll probably grind lower through the summer. There will likely be some rallies, like the first half of June, and there will likely be some nasty falls, like the month of May and today. And there will be the overhanging threat of a global financial meltdown, but most likely it will just be a grind it out summer. 


Some people think the US economy has pulled out of the recession and the recovery just isn't robust. Some people think the US economy might be headed for a double dip recession. Some people think we came out of a recession and now we're headed for a depression. I've been telling you for a long time that we have been and continue to be in a depression. We've seen some signs of life but not enough to pull us out of the depression. In a depression, even the good times feel like a grind. Enjoy.