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.

Thursday, January 10, 2013 - California As A Role Model

California As A Role Model

by Sinclair Noe

DOW + 80 = 13,471
SPX + 11 = 1472
NAS + 15 = 3121
10 YR YLD + .04 = 1.89%
OIL + .77 = 93.87
GOLD + 16.80 = 1675.80
SILV + .50 = 30.96

So, those are the closing numbers. At least, we think those are the closing numbers; give or take; kinda, sorta. It could be off a bit. The stock exchanges have a bit of a problem with something called the consolidated tape, which provides trade data. Seems it went out for about an hour at the New York Stock Exchange Tuesday, making it tough to see in anyone had traded in 165 securities. And the NYSE's screw up follows a similar snafu last week at the Nasdaq. The consolidated tape at Nasdaq went totally blank last week. The consolidated tape is the record of securities transactions across all US exchanges. If you're keeping track, the exchanges have recently had to admit they can't always run IPO's competently, there are some problems with faulty data and trade data. So, that's the closing numbers, more or less.

The World Economic Forum is underway in Davos, Switzerland. The annual gathering of the wealthy and influential includes the publication of a survey which outlines the concerns of about 1,000 experts. This year's report seemed to focus on the interplay between the environment and the economy, saying: “A sudden and massive collapse on one front is certain to doom the other’s chance of developing an effective, long-term solution.

That diagnosis underscores several points of contention in the United States, where there is a push for increased domestic energy production despite concerns from green groups about environmental impacts.The report said governments should invest in infrastructure upgrades to bolster resiliency to climate change and associated natural disasters.

Even if policymakers can recover to handle climate change, the report said experts wondered if we have "already passed a point of no return and that Earth’s atmosphere is tipping rapidly into an inhospitable state.”

While recognizing climate change is happening, the report said policymakers will need to become more comfortable making decisions without a conclusive set of data. At the same time, governments must boost research funding to gather more complete information.

The report also highlighted the income divide between rich and poor, ballooning government deficits, water shortages and aging populations as causes for concern.

For the past three years, the focus of Davos was the Euro-zone debt crisis. There seems to have been a shift away from worries about Euro-land and back to the political and budgetary process in the US, and whether the dysfunction will devolve into a political fistfight. Of course, it doesn't really matter what the rich folks think in Davos; the Forum isn't an official anything, just a lot of talk.

When it comes to most of the major political disputes in Washington, congressional Republicans insist Democrats focus on reducing the debt Republicans built up during the Bush/Cheney era. It underpins everything from the budget fight to the debt ceiling to efforts to expand public investments. What the debate tends to ignore is the debt reduction that's already happened; nearly $2.4 trillion in deficit reduction scheduled for the next ten years has already been signed into law. Roughly three-quarters of the deficit reduction has come is in the form of spending cuts.

As we enter the new year, the nation's most pressing economic problem remains the slow recovery, particularly the job market. Unemployment is still far too high and the rate at which we are creating new jobs is far too low. At the present rate of job growth, we are still several years away from full employment. The ability of monetary and fiscal policymakers to combat the slow recovery is constrained by three things: fear that aggressive monetary policy will drive up inflation to an unacceptable level; fear that tax cuts or increases in spending will worsen our long-run debt problem; and political disputes over taxes and the size and role of government.

There is debate that fiscal and monetary policymakers should do more to push an economic recovery, but the recent minutes from the last FOMC meeting indicate some reticence on the part of the Fed, and the question then becomes whether the Fed will try to increase rates and exit quantitative easing before the economy can enter a virtuous circle of growth. From the fiscal side, the best we can hope for is that the political standoffs over the deficit don't become disruptive.

Exactly how to avoid a political brawl remains to be seen. The debt ceiling will be breached some time in February. If nothing is done, the government will soon be unable to pay all of its bills in a timely manner. This unprecedented event would profoundly damage the government’s credit rating and send the financial system into a tailspin. So far, President Obama isn't giving in. Last week, he said he: “will not have another debate with this Congress over whether or not they should pay the bills that they've already racked up through the laws that they passed.”

So, what are the options? Well, one idea floated is the $1 trillion dollar platinum coin. And I'm sure we'll talk more about this plan in coming days and weeks; it's really a pretty good idea in some ways, and far too fantastic in others. The President could ignore the debt ceiling and direct the Treasury to issue more bonds to cover its obligations; a move that would likely result in even more political acrimony. And another plan has been used on multiple occasions in the nation's history, and as recently as 2009 – print IOU's.

The President could threaten to issue scrip — “registered warrants” — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.

The scrip would not violate the debt ceiling because it wouldn't constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. The president could therefore establish a scrip program by executive order without piling a constitutional crisis on top of a fiscal one.

To avoid any confusion with actual Treasury debt, and to be consistent with the law governing claims against the United States more generally, the scrip would not pay interest in most cases. And unlike debt, it would have no fixed maturity date but rather would become redeemable in cash only when the secretary of the Treasury was able to certify that there’s enough money available in the Treasury’s general fund to cover it.

The idea may sound crazy, but remember that California did it in 2009; the state issued registered warrants, totaling $2.6 billion to individual and business claimants, including recipients of aid programs, recipients of tax refunds and government contractors. Those holders who needed immediate cash were usually able to sell their registered warrants to banks at face value, though some institutions limited such purchases. Eventually a budget was worked out and the scrip was redeemed for cash. California continued to pay its public debt service in cash and on schedule and never lost an investment-grade credit rating.

California is expected to post a budget surplus of $851 million for the fiscal year that begins July 1. The solution was a combination of deep budget cuts and billions in new taxes approved by voters last year. Schools will be the big winner in the governor's new spending plan, receiving $56.2 billion in state funds, an increase by $2.7 billion over the last year. That funding is set to jump to more than $66 billion by 2016. The budget also dedicated an additional $350 million to the state’s public insurance program, Medi-Cal, to help implement President Obama’s healthcare law. This is a tentative surplus, and there is plenty of debt, but this is another small positive step. The plan in California is to increase spending slightly, about 5%, in the upcoming year after several years of budget cuts. California as a role model; go figure. 

Nearly a third of the nation's homeowners have no mortgage at all, according to an estimate released by real estate website Zillow. The free-and-clear class includes, predictably, retirees who have chipped away at their debts for decades, but also a surprisingly high percentage of young people and those who live in relatively affordable regions. Zillow found that the nation's most elderly were the most likely to own their homes, with 77% of those older than 85 owning their homes outright, followed by those ages 74 to 84, at about 62%. One outlier was those homeowners ages 20 to 24. Out of that relatively young demographic, about 34% owned their homes outright.

As the economy picks up, regions with high percentages of free-and-clear owners probably will get a boost. That means there is a lot more disposable income, and that is positive for the local economies. Out of the nation's largest metro areas, Pittsburgh, Tampa, New York, Cleveland and Miami had the highest percentages of mortgage-free homeowners. Washington, Atlanta, Las Vegas, Denver and Charlotte, N.C., had the lowest.

Wednesday, January 09, 2013 - Miscellaneous Financial News

Miscellaneous Financial News
by Sinclair Noe

DOW + 61 = 13,390
SPX + 3 = 1461
NAS + 61 = 13,390
10 YR YLD -.02 = 1.85%
OIL +.01 = 93.16
GOLD – 2.80 = 1659.00
SILV - .05 = 30.46

AIG, the insurance company won't join ex-CEO Maurice "Hank" Greenberg's lawsuit against the US government over the insurance giant's financial crisis bailout. Greenberg has filed a $25 billion lawsuit accusing the government of violating shareholders' rights by bailing out AIG, because the terms of the bailout weren't as cushy as Greenberg wanted. Thank you, AIG.

Earlier this week I told you about an $8.5 billion settlement announced between the Federal Reserve and the Office of the Comptroller of the Currency with 10 big mortgage services, including Citigroup, JPMorgan and Wells Fargo over botched foreclosure claims. Now, Goldman Sachs and Morgan Stanley and other banks are expected to agree to a $1.5 billion settlement with the regulators sometime this week. The other banks haven't been officially identified but best guess is that the group includes HSBC, Ally, EverBank, and OneWest Bank.

Goldman got into the mortgage servicing business by purchased Litton Loan Servicing and Morgan Stanley bought Saxon Capital. The Fed has ordered both firms to conduct case by case reviews of foreclosures after widespread mistakes were discovered in how the firms processed home seizures.

Meanwhile, Morgan Stanley plans to cut about 1,600 jobs, nearly 3 percent of its workforce. The cuts will focus on senior ranks at the bank. About half of the cuts will be in the U.S. Morgan Stanley's investment banking unit has been asked to cut about 6 percent of its staff.

Remember when the government offered an amnesty program for people who were evading taxes by holding funds in Swiss bank accounts; admit it, pay the tax plus penalties and all will be forgiven. Well, there was a hitch; taxpayers whose identities become known to the IRS before the clients come forward voluntarily are generally not eligible for the reduced fines and penalties.

UBS, the Swiss banking giant came under criminal investigation for its work selling tax-evasion services to wealthy Americans. Three years ago, UBS entered into a deferred prosecution agreement, agreed to pay a $780 million fine and later turned over more than 4,000 client names. More than four dozen American clients of Swiss and Swiss-style banks have been charged or indicted in recent years; today a 79 year old Florida woman pleaded guilty to criminal charges of tax evasion through accounts at UBS. She faces six years in prison, but probably won't face that much. She actually tried to enter a voluntary disclosure program with the Internal Revenue Service that would have allowed her to pay reduced fines and penalties, but the IRS already had her name.

The government will stop sending out Social Security checks as on March 1^st. No more paper checks. Instead, the Treasury Department will distribute funds electronically, either via direct deposit or on a prepaid "Direct Express" card. Most Social Security benefit recipients already receive their payments electronically, but 5 million checks are mailed each month. Over the next ten years, the move away from paper checks is expected to save about $1 billion.

As you have likely heard, President Obama plans to put Tim Geithner out of his misery tomorrow by nominating Jack Lew for Treasury Secretary. Lew is known for being Obama’s White House Chief of Staff and also for a truly bizarre signature. And, should he be confirmed and subsequently have his name printed on a bunch of dollar bills, Lew will likely be forced to come up with something that actually looks like it spells a name and not a Jackson Pollack painting.

US oil production topped seven million barrels per day for the first time since March, 1993 and is nearly 20 percent above the amount produced at this time last year. The latest weekly data from the Energy Information Administration shows that imports fell as domestic production continues to increase. The government now predicts the US industry could pump 14 percent more oil this year alone. The use of non conventional drilling techniques in places like North Dakota and Texas has created an explosion in US production to the point where the US is expected to pass Saudi Arabia in crude production by 2020.

At the same time, the industry is developing more pipeline capacity to carry crude from storage in Cushing, Okla. to the Gulf Coast refining areas. That should continue to drive the trend, create more refined product for the US and export markets, and the EIA says that should bring down oil prices over the next several years.

That's the good news. The bad news is that we're still burning fossil fuels, and the climate is getting hotter, not just warmer – hotter. The average temperature in the continental US last year was 55.3 degrees; that's a full degree higher than the previous record. Last year’s weather in the United States began with an unusually warm winter, with relatively little snow across much of the country, followed by a March that was so hot that trees burst into bloom. The soil dried out in the March heat, helping to set the stage for a drought that peaked during the warmest July on record. The drought covered more than 60% of the nation; comparable to a severe drought in the 50's and almost as bad as the Dust Bowl days of the 1930's. The drought killed corn and soybean crops, and forced ranchers to thin their herds. The Mississippi River's levels dropped so much that barge traffic backed up and even came to a standstill; stretches of it are deserted like a 'ghost town,' and some of it could be closed altogether as it heads below 3 feet in depth.

Don't forget the tornadoes, the Hurricanes (Isaac and Sandy), derechos, and of course, wildfires. Plain and simple, we need a cold winter with lots of snow, and then we'll need lots of rain to counter the drought. If we don't get it, then 2012 might seem mild. The drought of 2012 likely sliced one percent off the GDP. The nation was hit by 11 environmental catastrophes that cost at least $1 billion in losses. Climate is extremely complex. We may yet see some cold years. There is some thinking that the melting of ice at the poles could temporarily cool the oceans and reduce temperatures for a while. But the longer term trend is not only toward hotter, it is toward a kind of hotter that human beings may find it difficult to survive.

The Baseball Writers' Association of America's ballot for this year's Hall of Fame class listed 37 players, including 24 new candidates, including Barry Bonds – the all time leader in home runs, and Roger Clements – a seven-time Cy Young Award winning pitcher. To be inducted, a player must receive a vote on at least 75 percent of the ballots returned. The Baseball Hall of Fame's Class of 2013 will not have any new inductees from the ranks of the recently retired. It's a dark day in Cooperstown and steroids are the reason.

The Consumer Electronics Show is wrapping up in Las Vegas. If you were waiting for a 110 inch, high definition flat screen TV, it made its debut this week. On the other end of the spectrum was a smart watch; it syncs up with your smartphone so you can get emails, and text and other messages on a 1-and-a-quarter-inch screen. There were cameras everywhere; on top of bicycle helmets, built into racing goggles. There were pouches to let you use your smartphone underwater. There were 3D printers. They've developed mind over matter devices, or at least you can use your mind to transmit signals to electronics that will then move themselves. All you Jedi warriors need to start your training. And then there was one booth selling antennas; yep, big old fashioned television antennas.

The Partnership for Civil Justice Fund obtained a Freedom of Information Act request that revealed the FBI coordinated at length with local law enforcement, private financial institutions, the Federal Reserve and other government agencies to monitor the Occupy Wall Street movement’s activities. One of the things I learned was that the Federal Reserve System has its own commissioned law enforcement arm, the Federal Reserve Police, which is allowed to operate in uniform or plainclothes. Apparently, the FBI treated the Occupy movement as a potential criminal and terrorist threat even though the agency acknowledges in documents that organizers explicitly called for peaceful protest and did "not condone the use of violence" at occupy protests. The idea was apparently to crackdown on the Occupy movement, and it seems to have worked. Meanwhile, how many of the banksters ended up in jail? And a funny thing happened while all those private and federal law enforcement types merged together to crush some protesters in the park...,

Someone here at the radio station today told me her Bank of America credit card was being replaced. She talked to the bank and they said there was a problem with hackers. I don't know if there is a direct connection but at least nine financial institutions have been hit by hackers since September; more attacks are expected. And part of what makes them suspicious is that they seem calculated not to steal account data or money, but instead to disrupt the banking system. Government officials say Iran is behind the attacks. The distributed denial of service attacks, which seek to overload an online system's ability to respond to requests, targeted Bank of America, Citigroup, Wells Fargo, U.S. Bancorp, PNC, Capital One, BB&T, HSBC, and Fifth Third Bank. You might want to make sure your credit cards are still working.

Tuesday, January 08, 2013 - Thank You, America

Thank You, America

DOW – 55 = 13,328
SPX – 4 = 1457
NAS – 7 = 3091
10 YR YLD -.03 = 1.87%
OIL +.06 = 93.25
GOLD + 13.20 = 1661.10
SILV + .24 = 30.50

Some people have debated what we should do if the banks get into trouble again; should they be bailed out? The Too Big to Fail Banks of 2008 are even bigger today, and if one collapses, then there would likely be a cascading effect through the global financial system. So, if a big financial institution gets into trouble, should there be a bailout, or do we just say “tough luck”? You probably have an opinion, and reasonable people can debate the issue, or at least there could be room for reasonable debate, until now. As of today, there is no more debate.

If you go to Webster's Dictionary and look up the word “ingrate”, you will find a picture of Maurice “Hank” Greenberg; the guy who founded American International Group, AIG, the huge insurance company that in 2008 accepted a $182 billion dollar bailout from the Treasury. Hank Greenberg, the former CEO of AIG is contending in a lawsuit that the government treated the company’s shareholders too harshly when carrying out its 2008 rescue of the insurance giant. AIG is weighing whether to join the lawsuit, filed by Mr. Greenberg’s investment firm, Starr International Company, which owns about 12% of AIG. In addition to founding AIG, Greenberg gained notoriety for a high profile fraud case in 2005 that pushed him out of his CEO role at AIG. Greenberg was accused of using sham transactions to mask the company's financial position.

So far, AIG has not joined in the suit with Greenberg. The choice is not a simple one for the insurer. Its board members, most of whom joined after the bailout, owe a duty to shareholders to consider the lawsuit. If the board does not give careful consideration to the case, Mr. Greenberg could challenge its decision to abstain. Should Mr. Greenberg snare a major settlement without A.I.G., the company could face additional lawsuits from other shareholders. In other words, the board of directors may have a fiduciary duty to sue the government.

One of Starr International’s major arguments is that AIG’s bailout terms were far tougher than those granted to other large financial firms. Greenberg has accused the New York Fed of using the rescue to bail out Wall Street banks at the expense of shareholders, and of being a "loan shark" by charging exorbitant interest of 14.5 percent on the initial loan. 

The Treasury did force AIG to do things which were against their very nature. AIG was forced to pay full settlement on credit default swaps; one-hundred cents on the dollar, to the tune of more than $12 billion to Goldman Sachs alone. Now remember these credit default swaps were a form of insurance but they weren't insurance, and they were and remain largely unregulated. CDS is not like insurance in that it does not require reserves be held to pay off claims. The whole idea behind CDS was to collect premiums without ever paying claims. To force AIG to make full payment on a CDS claim was unprecedented and now Greenberg claims it was cruel and unusual punishment.

AIG’s cash needs and internal failings were in many ways far more serious than those of other institutions. In fact, the company was in such dire straits after the rescue that the government eased up on the terms. The concessions were considerable.

In early 2009, the Federal Reserve cut the interest rate on a big loan to AIG, saving the company about $1 billion a year in interest. Then the Treasury exchanged $40 billion of preferred shares for new ones that effectively paid no cash dividends to taxpayers. If it had paid the originally agreed 10 percent dividend on all these and other preferred shares, the insurer would have paid roughly $20 billion from the beginning of 2009 to the end 2012. Instead, the preferred shares were converted into common stock, which the government later sold, purportedly turning a profit of about $22 billion.

The bailout eventually worked out for AIG. After losing half its value in 2011, the stock rose more than 52 percent in 2012, tripling the gains of the broader S&P insurance index. Things worked out so well for AIG that they are now running a television ad campaign called “Thank You, America” in which it offers its gratitude for the bailout.

Mark Twain was right; truth is stranger than fiction because fiction is obliged to stick to possibilities.

Seriously, thank you, America.

There has been a lot of talk about breaking up the big banks, cutting them down into smaller banks that don't threaten the global financial system. The Dallas Federal Reserve has called for breaking up the biggest banks. Texas Republican Jeb Hensarling, the new Chairman of the House Financial Services Committee has expressed concern about the Too Big to Fail banks. Elizabeth Warren was elected in Massachusetts and she will sit on the Senate Banking Committee. Even Sandy Weill and John Reid, co-founders of Citigroup, which originally pushed through legislation which destroyed Glass-Steagall; they are now proposing that Glass-Steagall be reinstated and the biggest banks be broken up. The timing would seem to be right. Don't hold your breath.

The bank lobby will fight any attempts to break up the banks. Eventually, we will come back around to a big bank or insurance company on the verge of collapse and begging for a bailout; it's inevitable; the banksters continue to gamble in the derivatives markets, and eventually all gamblers lose, and when they lose.., please, please remember the story of Hank Greenberg and AIG.

Alcoa has kicked off the fourth quarter earnings reporting season by posting a profit of $242 million, or 21 cents per share, compared with a net loss of $191 million, or 18 cents per share, in the year-ago period. Excluding one-time items, net income was $64 million, or 6 cents per share, in line with average analysts' expectations of 6 cents.

Alcoa is supposed to provide clues about earnings, but I've never found a good correlation. Instead the earnings season has become little more than an exercise in obfuscation. Take the phrase “excluding one-time items”; that means the cost of doing business. Lucy Kellaway at Financial Times has come up with what she calls the Golden Flannel Awards, a mock celebration of corporate malarkey. Here's an example from one annual report: “In the wholesale channel, Burberry exited doors not aligned with brand status and invested in presentation through enhanced assortments and dedicated customised real estate in key doors.” I don't know what that means, but it might surprise you to learn that Burberry sells raincoats and they don't manufacture doors. Another company, called Record, does manufacture doors, which they call “entrance solutions”.

Sometimes companies create new words, such as: solutioneering, sustainagility, or innovalue. Sometimes, companies say things that are just designed to hide reality; for example, Citigroup issued a press release that talked about “optimizing the customer footprint across geographies,” which means they fired 1,100 workers. Citigroup also got the top prize by declaring that from now on they would offer “client-centric advice”. Sounds good until you think about what they've been offering up to now.

I still think it will be hard to top AIG's “Thank you, America.”

Anyway, welcome to earnings reporting season.

So, I was away on vacation over the holidays, but I'm catching up on the fiscal cliff deal. It has some interesting provisions; lots of little and not so little special deals, especially in the form of tax breaks. For a bunch of lawmakers who were supposedly so busy and so involved in "negotiations," they were remarkably productive when it came to special interests.

There's $9.7 billion over the next 10 years on additional subsidies for student loans or $5.6 billion for adoptions, although both those figures seem like a lot considering that employer-provided childcare is getting only $209 million. More money is at stake in subsidies for various businesses, $46 billion, and $18 billion for alternative energy. 

There's a special 50% tax credit for maintaining railroad tracks is projected to cost $331 million over the next two years.

Tax benefits for certain motorsport racing track facilities, such as Nascar, will cost more than $100 million over the next seven years.

Business property on Indian reservations will receive $660 million in tax breaks over the next three years. Indian employment tax credits will total $119 million over the next four years. Tax breaks for Alaskan Natives receiving trust income will add up to $46 million over 10 years.

More favorable deductions for contributions of food to charities will cost $314 million over two years. For contributions of property, the benefit will be $225 million over a decade.

Film and television production got the last-minute extension of tax write-offs worth $430 million over the next two years.

Businesses in Puerto Rico will receive $358 million over the next two years. In addition, a temporary increase in the excise tax rebate on rum production will give Puerto Rico and the U.S. Virgin Islands $222 million, much of which will go to benefit local rum distillers.

Regulated Investment Companies, such as mutual funds and real estate investment trusts, are to receive $211 million in tax benefits over the next two years. Some of that pertains to dividends paid to foreign investors.

Over the next two years, additional economic development credits for American Samoa will cost $62 million.

Over the next three years, $7 million will go to expand credits for plug-in electric vehicles to include motorcycles. That's a 10% rebate, up to $2,500 for buying an electric scooter.

$59 million in credits for fuel made from algae and expanding benefits for certain other biofuels.

Tax credits for renewable diesel fuel and small agricultural producers of biodiesel will total $2.2 billion over the next five years.

Asparagus growers will get $15 million.

There’s a provision that allows workers to convert conventional 401(k)s into Roth 401(k)s at a cost of $12.2 billion over the coming decade.

There were big breaks for private equity firms and hedge funds, including the

the continuation of the “carried interest” which in effect allows sophisticated investment managers to postpone their earnings from a deal and then often pay taxes at capital gains rates that are lower than the rates for fee income.

And a $9 billion tax break for big banks and manufacturers related to "active financing." Active financing is a special transaction tax break that specifically allows multinational companies to avoid paying US taxes on foreign earnings if those profits resulted from "actively" financing a deal or activity on foreign soil. Not surprisingly, big businesses claim it helps them be more competitive abroad.

Thank you, America.

Monday, January 7, 2013 - I Went on Vacation and Not Much Changed

I Went on Vacation and Not Much Changed

by Sinclair Noe

DOW – 50 = 13,384
SPX – 4 = 1461
NAS – 2 = 3098
10 YR YLD -.01 = 1.90%
OIL + .21 = 93.30
GOLD – 9.90 = 1647.90
SILV - .02 = 30.26

Forty years ago, Yale Hirsch at the Stock Traders Almanac, created the January Barometer. The idea was simple: as the S&P 500 goes in January, so goes the year. This market prediction tool has been correct 89% of the time since 1950, suffering only seven major setbacks. Since 1950, stocks have finished lower for the year only three times after posting gains in January. When the Dow is positive in January, then the rest of the year is positive 83% of the time, averaging additional gains of 9.59%. Compare that to the Dow’s performance when January is negative. In those years, the February-December returns are positive just half of the time, with an average gain of 2.04%.

As with the full-year results, a positive January typically leads to a positive February. When the Dow closes higher in January, February goes on to average a return of 0.57%, and is positive 63% of the time. When January is negative, February is negative more than half the time, and averages a loss of more than 1%. However, an outsized return in January has not necessarily translated into a bigger return for February. If January is up more than 3.5%, the average February gain is not as big as if January is simply positive.

Price movement in January is also a pretty good predictor of price movement in February for individual stocks; not a perfect predictor but usually moving in the same direction about 80% of the time.

Many investors look to the first five days of January as a gauge of where the markets are going for the rest of the year. During the last 40 years when those five first days were gainers, the markets were up for the entire year 85 percent of the time. For example, last year the S&P 500 Index gained 1.2 percent in the first five days of January. As a result, the S&P 500 Index was over 13 percent. That was close to the historical average. Over the last 39 years, the markets gained an average of 13.6% when the first five days of January were gainers.

Conversely, when the first five days are negative the markets were down for the year, but only 47.8% of the time. The indicator therefore, does not work as well on down periods. You should be aware that, in general, during post-election years the markets have not done well. Only 6 out of the last 15 post-election years saw gains in the first five days of the year. It looks like 2013 will be an exception. Maybe, maybe not. That's why they play the game.

The fiscal cliff is behind us, sort of; there are still the actual implications of the implementation of the changes. Then, we have the debt ceiling, which will be the next catastrophic, OMG, here comes another massive economic sky-is-falling event, they'll shut down the government if they don't get cookies for lunch, political tantrum. Before we move to the next news cycle, let's review briefly the fiscal cliff calamity that was narrowly averted, specifically $205 billion in corporate tax breaks, subsidies and tax loopholes. One of the most egregious giveaways included in the New Year's Eve fiscal cliff deal is an extension of a loophole that allows corporations to book US profits in overseas, tax-free accounts. US companies have about $2 trillion in these offshore accounts.

Another corporate tax benefit included in the fiscal cliff deal is a provision known as bonus depreciation, which allows companies that invest in costly equipment to account for depreciation expenses much faster than they otherwise could. In other words, companies can deduct more in expenses now, lowering their taxable income.

Congress has extended the provision each year since 2008 in an effort to spur business investment during the economic downturn. Bonus depreciation is expected to cost $35 billion this year, according to the Joint Committee on Taxation, and those costs are predicted to rise significantly if Congress keeps extending the benefit. The Congressional Research Service issued a report saying that accelerated depreciation is a “relatively ineffective tool for stimulating the economy.”

I guess that avoiding the fiscal cliff is a good thing; it shows the politicians can do something; even if it's the same old, same old.

New Year, things change, but not much. Let's see what the banksters have been up to. Once again the banks are body slamming the banking regulators. The banks have beaten down the tough parts of Basel III bank-capital standards. The global liquidity standards were designed to ensure banks had sufficient capital on hand to survive another Lehman-like crisis, as well as require that capital be high-quality and liquid. There was a lot of fanfare from regulators when the regulations were first announced in 2010, and then the banks started to chip away at the regulations which might require a little cushion against a downturn. The regulators succumbed to pressure. We're all shocked, shocked I tell you. The new capital rules have been expanded to change the definition of what constitutes safe bank capital to include stocks and AAA rated mortgage backed securities.

Now, you're probably asking yourself, “Self, weren't stocks and mortgage backed securities really dangerous and excessively risky investments that were a big part of the financial crises of the recent past?” And of course the answer is – yes. “Self, didn't those risky gambles lead to a freeze on the credit markets and the near collapse of the global financial system?” And again, the answer is – yes. And then you ask: “Self, does this mean we'll see Hank Paulson getting down on his knees to beg Nancy Pelosi to save him from his errors?” And the answer is no; that's not going to happen again, but clearly we haven't learned our history lessons.

In a world of Too Big to Fail banks that have only gotten bigger, the regulators decided that if the banks were to face a crisis, like the recent crisis, the banks would only have to prepare for a world in which they lose 3 percent of their retail deposits, down from 5 percent originally proposed. Complete amnesia when it comes to Northern Rock or IndyMac. And then the banks have four years to gradually phase in the new, scaled down 3-percent requirements, down from the 2-year requirement originally proposed. The banks argued that if they were forced to provide a 5-percent cushion and do so within two years, it would be too much of a burden and they wouldn't be able to do any lending, which might actually help the global economy.

Meanwhile, federal bank regulators announced an $8.5 billion settlement with 10 large mortgage companies in a deal that will end a near worthless foreclosure review program in favor of a new program that authorities say will distribute aid to homeowners "significantly more quickly."

Under the deal, announced by the Office of the Comptroller of the Currency and the Federal Reserve, the mortgage companies will make $3.3 billion in direct payments to "eligible borrowers" whose foreclosures were handled improperly, and will make $5.2 billion available in other assistance to struggling borrowers, such as loan modifications.

This new deal is separate from the $25 billion mortgage settlement to which five large banks agreed earlier this year, though many of the allegations of misconduct are the same. Homeowners have complained for more than five years that the mortgage companies made widespread errors in the management of their home loans, and that in some cases those errors pushed them into foreclosure.

This new settlement replaces a deal struck in April 2011 that established the Independent Foreclosure Review; that program was supposed to give homeowners an unbiased third-party review before the banks could foreclose, and might even determine if homeowners qualified for a cash payout because of mortgage related bank abuses. So, that program never really happened, and today's announcement is basically saying the Independent Foreclosure Review was a complete failure.

What went wrong? Part of the problem is that the third-party independent reviewers actually worked at the banks' beck and call. So, ten different banks will pay out $8.5 billion to end the foreclosure reviews.

But wait, there's more!

Bank of America announced today that it will spend $10 billion to settle mortgage claims resulting from the housing meltdown. BofA will pay $3.6 billion to Fannie Mae and buy back $6.75 billion in loans that the bank and its Countrywide banking unit sold to the government agency from Jan. 1, 2000 through Dec. 31, 2008. That includes about 30,000 loans.

Bank of America said that the loans involved in the settlement have an aggregate original principal balance of about $1.4 trillion. The outstanding principal balance is about $300 billion. Fannie Mae and Freddie Mac, which packaged loans into securities and sold them to investors, were effectively nationalized in 2008 when they nearly collapsed under the weight of their mortgage losses. So, all in all, BofA gets off really cheap.

Fannie Mae issued a statement saying they had “diligently pursued repurchases on loans that did not meet our standards at the time of origination, and we are pleased to have reached an appropriate agreement to collect on these repurchase requests."

And so, there is $8.5 billion for ten banks, and $10 billion in fines for BofA, and you might think that's real money, and it almost is, but keep it in perspective. The six biggest US banks are expected to pay employee bonuses of $38 billion for the past year.

Bank stocks led all other major stock sectors in 2012. The KBW Bank Index rose more than 30% compared to just over 13% for the S&P 500, and Bank of America shares surged 109%--more than doubling in price. And according to a new report from ProPublica, many banks are still trading below book value, despite the gains in share prices, and much of the gain is due to hedge fund speculation.

And so, you're probably asking yourself: “Self, wasn't hedge fund speculation a big part of the near meltdown of the global financial system? Isn't this just part of the multi-trillion dollar derivatives casino? Isn't this the same sort of risky stuff that the London Whale was betting on and which led to $2 billion in trading losses, or $5 billion, or $6 billion in gambling losses?” And the answer is – yes.

A funny thing is happening in the copper markets. The SEC has paved the way for investors to take a direct stake in commodities, rather than through commodities futures. The agency gave the green light to JP Morgan to launch a fund whose shares would be backed by warehoused copper. In practical terms, the SEC handed traders at JP Morgan control over 20 to 30 percent of the copper available for immediate delivery from the London Metals Exchange — the commercial market where companies that use copper go to procure last-minute supplies.

The investors purchasing shares in J.P. Morgan’s fund won’t be buying copper to use, but to store. The intricacies of the fund are complex, but its underlying rationale is straightforward: the more shares investors buy, the more copper is taken off the market. And the more copper that is taken off the market, theoretically the more valuable the copper and the shares become.

Moreover, it’s a no-brainer that this JP Morgan “innovation” will lead to the creation of copycat fund in other markets, most troublingly those for agricultural products.

The SEC asserts that its own study showed that changes in inventory levels at the LME did not have a price impact. If you've ever heard a little theory known as supply and demand, you might reach a different conclusion than the SEC.

The question regarding the LME would be to define what a normal level of inventory would be (a certain level is necessary to handle routine transactions); amounts in excess of this buffer level would be seen by economists as proof that prices were above the true market clearing price unless you had a good explanation as to why not.

Companies that use copper strongly oppose the new fund, and argue that allowing investors to hoard the metal will lead to supply shortages, create substantial price volatility, and distort the market. A group of copper users wrote to the SEC in August, saying: “The implications of this practice would be grave for our companies, our industry, and, indeed, for the U.S. Economy.”

The SEC is undermining provisions in Dodd Frank calling for the CFTC to rein in undue speculation in critical commodities. You might remember that commodities prices moved up in a coordinated manner in 2008. Remember when oil prices jumped up near $150 a barrel? It looked like a speculative bubble, and was, since prices collapsed in the second half of the year. Well, there was similar behavior in other commodities.

Here, you’re allowing investors to intervene with physical supplies. BlackRock has petitioned the agency to launch its own copper fund, one that would be twice as large as JPM’s and will get an answer by February 22. Given that its proposal is identical to JPM’s, it is well nigh certain to be waved through. If the nay sayers are correct, that hoarding by investors will drive prices up, we should see the impact, although the mere announcement of the JPM approval, particularly in light of the pending BlackRock application, may have led speculators to bid up prices in anticipation of the funds’ launch. That too should be measurable, but if the next few months proves the SEC analysis to be wrong, you can bet the agency won’t admit its error and halt the creation of more funds.

Same old, same old.