Thursday, October 03, 2013 - Don't Underestimate the Idiocy

Don't Underestimate the Idiocy

by Sinclair Noe

DOW – 136 = 14,996
SPX – 15 = 1678
NAS – 40 = 3774
10 YR YLD - .02 = 2.61%
OIL – 1.22 = 102.88
GOLD + .40 = 1317.70
SILV - .04 = 21.80

Well, we won't be able to sift through the jobs report tomorrow, due to the government shutdown. There are lots of things that won't happen tomorrow, but next week, the International Monetary Fund and the World Bank will meet in Washington. Ahead of the meeting, Christing Lagarde, the IMF Director delivered an assessment of the global economy. It's subdued. Lagarde says “In many of the advanced economies, however, we are finally seeing signs of hope. Growth is looking up, financial stability is returning, and fiscal accounts are looking healthier.”

The impact of a slowdown on US Federal Reserve asset purchases had been expected to dominate this year’s annual meetings but the Fed’s decision to hold off on tapering has removed that focus. And attention will now turn to the spectacle of a government shutdown and impending debt ceiling default. Lagarde called the debt ceiling “mission critical”, because “the normalization of monetary policy affects so many markets and people across the globe, the US has a special responsibility: to implement it in an orderly way, linking it to the pace of recovery and employment; to communicate it clearly; and to conduct a dialogue with others.”

Late yesterday, President Obama was interviewed by CNBC and he warned that investors should be worried, saying “This time's different. I think they should be concerned.”

It was a pretty clear message to political opponents that even their Wall Street benefactors are growing weary of this mess, saying “I think Wall Street can have an influence. CEOs around the country can have an influence. This is going to have a profound impact on our economy, their bottom line, employees and shareholders unless we start seeing a different attitude around that faction of Congress.”

Today, the Treasury Department released a report warning of catastrophic damiage if Congress fails to raise the debt ceiling. The report states: "A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."

The Treasury report mentioned that even the prospect of default can cause economic problems, including lower consumer confidence, stock market volatility and higher interest rates on business loans and mortgages. An actual default could have consequences for years to come. The US has never defaulted on its debt, but the cost of insuring one-year Treasury bonds against default has quintupled in the past 10 days.

So, the president says there is cause for concern; the Treasury warns of a catastrophe; and the IMF says the debt ceiling is mission critical, and Wall Street slips a little, but apparently they haven't yet figured out how to turn this into a full fledged panic. There is an air of complacency that might linger until the last minute. Warren Buffett says, “We will go right up to the point of extreme idiocy, but we won’t cross it.” Maybe, but I think Warren underestimates the idiots.

If the debt-limit isn’t lifted, the Treasury will face the prospect of violating one of three laws: The World War I-era statute that created the debt limit, the ban on direct lending to the Treasury from the Federal Reserve, or the 14th Amendment declaring that the legitimacy of U.S. debt must go unquestioned.

There may be some ways to circumvent default, but those options are all “iffy”, at best. The most widely discussed strategy would be for President Obama to invoke authority under the 14th Amendment and essentially order the federal government to keep borrowing, an option that was endorsed by former President Bill Clinton during an earlier debt standoff in 2011. Other potential October surprises range from the logistically forbidding, like prioritizing payments, issuing i.o.u.’s or selling off gold and other assets, to more fanciful ideas, like minting a trillion-dollar platinum coin.

President Obama will not invoke a constitutional amendment to unilaterally increase the nation’s debt limit if  an  impasse with House Republicans causes that ceiling to be breached in two weeks. White House press secretary, Jay Carney, said: “We do not believe that the 14th amendment provides that authority to the president.” The president, he added, “completely” agrees with his advisers’ legal reasoning. More specifically, this removes the idea of an impeachable offense. Of course, that doesn't mean the debt-ceiling will be lifted; again, we should not underestimate the idiots.

But it all goes back to the complacency of Wall Street, which hasn't hit panic stage but has been drifting lower. The Dow Industrials have quietly dropped 9 of the last 11 sessions, shedding 720 points along the way, to close under 15,000. Wall Street is concerned but not yet convinced of a catastrophic default, but also cognizant that the possibility of default forces the Federal Reserve to avoid the taper.

Earnings estimates have been slow in coming down. And the stock market, supposedly forward looking and focused on corporate revenues and earnings, has been completely blind to them. Fundamentals no longer matter. All that matters is the Fed. A shift that has become the Fed’s most glorious accomplishment. And the Fed continues to feed Wall Street with $85 billion a month. Step right up and gorge.

Yet in this infinite QE environment where there is no gravity for stocks and even junk bonds, the smart money is selling hand over fist, unloading whatever they can, however they can. Record junk bond issuance is just one aspect. Another aspect: IPOs. They have gone haywire.There were 23 IPOs in May, 20 in June, 17 in July, 19 in August, and 21 in September. But last week alone, there were 12 IPOs – more than two per day. And today, with all the dire warnings, Twitter announced its IPO. Generally, IPOs are scheduled apart to avoid overloading the market. But now the smart money is scrambling to issue paper while it still can and stuff it into the portfolios of retail investors at current “out of whack” valuations, stocks and bonds alike, before the Fed turns off its crazy money spigot, and before investors will finally open their eyes to the grim earnings reality.

Meanwhile, junk bond issuance hit a record high in September, at more than $47 billion. Year to date, issuance amounted to $255 billion, blowing away last year’s volume for this period of $243 billion. The year 2012, already in a bubble, set an all-time record with $346 billion. This year, if the Fed keeps the money flowing and forgets about that taper business, junk bond issuance will beat that record handily.

Junk-bond funds got clobbered in July and August as retail investors briefly opened their eyes and realized what they had on their hands and fled, and they went looking for yield elsewhere, but there was still no yield in reasonable places, and so they held their noses and picked up these reeking junk-bond funds again. Cash inflow doubled over the last week to $3.1 billion, the most in ten weeks.

These retail investors were fired up by the Fed’s refusal to taper even a little bit, giving rise to the hope that it might actually never taper, that this is truly QE to Infinity, Wall Street’s dream come true. 

The theory is that the Fed is mortally afraid that any taper would pop the asset bubble it has inflated over the last five years. Toss in the threat of a debt default and the Fed must have felt like a porcupine in a room full of balloons. Functionally, the Fed believes that the only cure for a burst bubble is a bigger bubble, so this comes as no surprise. They appear to be willfully blind that, in an era of plutocratic concentration of wealth, the old supply-side nostrums don’t work.

What else? Well, you'll remember that in 2012, a coalition of 49 states and the US reached a settlement with five of the country’s largest mortgage servicers, Wells Fargo, Bank of America, JPMorgan, Citi, and Ally in an effort to stop abuses such as “robosigning” of documents used in foreclosure proceedings and to lower barriers to modifications of loans. 

Now hold onto you hat; the banks are still behaving badly. Wells Fargo was sued by New York state over claims the bank failed to uphold terms of a $25 billion mortgage-servicing settlement aimed at helping distressed homeowners avoid foreclosure. Wells and BofA were accused by New York Attorney General Eric Schneiderman of violating the provisions of the national accord by continuing to impose unnecessary delays on borrowers seeking to modify the terms of their loans. BofA has agreed to mend its evil ways, but Wells Fargo just couldn't get their act together.

Wells Fargo is one of the most difficult banks for distressed homeowners to deal with, Schneiderman said at the press conference. The bank sends “incomprehensible communications” to borrowers; he even read a letter from the bank to a homeowner; it was pure goobledygook. After months of discussions with both banks, Wells Fargo “refused to acknowledge there’s a problem.” 

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.

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.