Category: Finance

Not Enough Bullets………


Disgraceful

Various regulators tell us that there is no t need to send the banksters to jail, because the fines are deterrence enough.

Guess what? Those same regulators end up never collecting those fines:

On a plane earlier this week, I watched The Wolf of Wall Street. The film’s outsized antics—public masturbation, the tossing of little people, lots and lots of Quaaludes—seemed too big for a seatback screen, or, for that matter, reality. As despicable as some of Jordan Belfort’s behavior was, I was able to occasionally laugh at Leonardo DiCaprio’s version of him knowing that, by now, more than 10 years after his real-life sentencing, Belfort has been sufficiently punished.

But in fact, that’s hardly the case: After pleading guilty to fraud and money laundering, Belfort was ordered in 2003 to pay out about $110 million to those he wronged. Since then, he’s only paid $11.8 million. He was also sentenced to four years in federal prison, but he only ended up serving just shy of two years.

………

Belfort’s relatively consequence-free story is only one of the more prominent ones in a parade of aggravating numbers reported on earlier this week by The Wall Street Journal. There’s still $97 billion out there in penalties that the Justice Department has failed to recover, and between September 2012 and September 2013, the department collected only 22 percent of penalties doled out. One particularly demoralizing figure was that the Commodity Futures Trading Commission had collected about a tenth of a percent of the $3.7 billion owed to wronged investors.

So how do convicted felons go about avoiding their payments? Take the case of Paul Bilzerian, who owed the Securities and Exchange Commission $62 million and paid only $3.7 million over the course of 25 years. (The Journal reported a few days ago that the SEC was officially giving up on getting any more money from him, after having spent $8.6 million to get the meager amount that they did obtain.)

Bilzerian has systematically thwarted federal prosecutors by building a web of trusts, partnerships, and corporations established in sketchy tropical locales. He has passed on cash and assets to his sons. He delayed prosecutors for years with a bankruptcy filing. And he has transferred ownership of his 28,000 square-foot home to trusts that were owned by, at various times, his in-laws and his neighbor’s mom. “Do you think I’d be stupid enough to have a bank account?” Bilzerian told a Journal reporter.

So, someone gets caught selling a dime bag, they take everything through asset forfeiture, but this guy is living in the lap of luxury.

You know, these guys are economic terrorists.

Why can’t we drone them?

Bullsh%$

Eric holder is now saying that the DoJ will finally start prosecuting bankers:

The Justice Department has launched criminal fraud investigations of individuals at Wall Street firms, with the hopes of filing formal charges in the coming months, Attorney General Eric H. Holder Jr. said Wednesday.

“We are making good progress in these cases, which involve conduct that has undermined the integrity of our markets,” Holder said at New York University Law School.

The nation’s top prosecutor did not go into detail about the inquiries, but people familiar with the cases say the probes involve the possible manipulation of the $5.3 trillion global foreign-exchange markets.

At least seven banks, including JPMorgan Chase, Citigroup and Barclays, disclosed in regulatory filings last year that “various government authorities” had requested information about their trading activities. Bank employees have turned over information to U.S. authorities about the trading scheme, according to people who were not authorized to speak publicly about the ongoing investigations.

If any person is criminally prosecuted, it will be the little fish, and any settlement will be small enough to be dismissed as a cost of doing business, and any admission will be minor enough that no bank will lose their dollar clearing privileges.

This is theater.

Lucy will pull away the football, again.

If Eric “Place” Holder or Barack Obama were interested in prosecuting law breakers on Wall Street, they would already have done it.

There is no interest in this administration in prosecuting the general criminality that is the US financial industry.

H/t CT at the Stellar Parthenon BBS.

It Ain’t the Salt in the Pasta Water, and it Ain’t the Bread Sticks, It’s the Looting

Have you read the story about the hedge fund that criticized the Olive Garden restaurants for how they boiled their pasta and complained that they served too many bread sticks?

Read further, past the cute suggestions about food prep, and it becomes clear that the Starboard Value hedge fund was interested in srtip mining the real casual dining chain and leaving nothing behind but its bleached bones:

Last week, you may have noticed a kooky story about a hedge fund named Starboard Value chastising Olive Garden for handing out too many unlimited breadsticks at a time, and failing to salt its pasta water. The snarky 294-page presentation highlighted everything wrong with Olive Garden, along with recommendations to fix it. And there was much laughter.

………

Except Starboard Value does not spend its time crusading for better mid-market Italian meals for no reason. It owns a bunch of shares in Olive Garden’s parent company, Darden Restaurants, and wants to take control of the company’s board. The scheme it’s concocted to increase its share price has little to do with breadsticks and pasta water. It really wants to steal Olive Garden’s real estate, and make a billion dollars in the process.

Starboard Value doesn’t try to hide this. Right in the executive summary, it talks up Darden’s real estate holdings the way a starving man sizes up a steak. Darden, owner of LongHorn Steakhouse, Capital Grille and other chains, “has the largest real estate portfolio in the casual dining industry, owning both the land and buildings on nearly 600 stores and the buildings on another 670,” Starboard Value writes. “We believe that a real estate separation could create approximately $1 billion in shareholder value.” Here’s the actual slide:

This is a more common technique than you might realize. Private equity firms often buy businesses with lots of real estate assets, like nursing homes, restaurants or retail outlets. They then split the company in two: one owns all the real estate, and one manages the rest of the business. The operating company now has to lease back the real estate from the property company, paying rent on what it used to own. The private equity firm, meanwhile, can take profits from the lease payments or by selling the entire real estate portfolio, making back its initial investment. The more expensive the leases, the more the private equity firm makes.

………

A sale-leaseback arrangement may make sense for a company with lots of real estate holdings, if it needs quick cash to make investments and cannot access a loan. Think of it like a company making a reverse mortgage. But Eileen Appelbaum of the Center for Economics and Policy Research, co-author of a recent book called “Private Equity at Work: When Wall Street Manages Main Street,” explains the key difference. “If the company does this themselves, they get to keep the money from the sale,” Appelbaum told Salon. “And they get to spend it to make improvements. In this case and the private equity case, the shareholders see the value.” Basically, Starboard Value wants to strip Darden’s assets, the Wall Street equivalent of pocketing the silverware.

Starboard Value has a history of asset-stripping. Earlier this year, it forced Wausau Paper to change CEOs and consolidate mills, moving out of the century-old headquarters that gave the company its name. Starboard Value demanded the company use some of those savings from laying off workers to pay Starboard a dividend.

In May, Starboard Value forced Darden to sell another of its chains, Red Lobster, to private equity fund Golden Gate Capital for $2.1 billion. The same day, Golden Gate sold the real estate of 500 Red Lobster locations to a real estate investment trust (REIT) for $1.5 billion. Darden used proceeds of the sale to give dividend payments to shareholders like Starboard Value. And Golden Gate made back most of the investment in a blink with the real estate sale. But Red Lobster now has to pay exorbitant rents on its restaurants. “The sale-leaseback will cut their net earnings roughly in half,” Eileen Appelbaum estimated.

If Olive Garden has to cut its earnings in half to pay rent on properties it previously owned, you can forget about upgrading the menu or making any of the other improvements Starboard Value suggests. The restaurants will barely be able to keep afloat. But Olive Garden’s continued existence is of minimal importance to Starboard Value. “These are shareholders, they don’t really care what happens once they make their money,” said Eileen Appelbaum.

Note here that the ratf%$S who want to dismantle the chain, and sell it for parts, much like an chop shop for stolen cars.

This is what tools like Timothy Geithner call financial innovations. It’s not. It’s a pernicious form of parasitism.

As the old saying goes, “The best way to rob a bank is to own one.”

While a modern economy need a way to get capital from people who have it to people who need it, this has nothing to do with that.

I’m not sure what the whole solution is, but a Tobin Tax on financial transactions would be a good start.

Locking up some of these crooks would be nice too.

And While We are On the Subject of how Hedge Funds are F%$#ing the Pension Funds


Mission Accomplished:
First, you get money to your cronies, and 2nd you f%$# public servants and pub lic sector unions.

Sometimes, it is not just over-priced under-performance, sometimes, it’s corruption. Case in point, the  disastrous decision by Chris Cristie to move a significant portion of New Jersey’s pension funds to Christie cronies on Wall Street:

New Jersey investment officials have directed increasingly large slices of state pension money into riskier investments, such as hedge funds, touting their strategy as a means of limiting exposure to a volatile stock market. They’ve argued that their approach would maximize overall returns and justify the higher fees paid to Wall Street money managers.

But in seven of the eight years since the state began shifting pension funds into so-called alternative investments, returns have fallen well short of the broader stock market, an analysis of state financial records shows. In those seven years, New Jersey’s alternative investment portfolio has produced gains of just more than half of the S&P 500, the widely watched index seen as a proxy for shares of large corporations.

Since Gov. Chris Christie took office, he has nearly tripled the amount of retiree cash invested in alternative investment firms — many of whose employees have made financial contributions to political groups backing Christie’s election campaigns. In that time, the gap between New Jersey’s alternative portfolio and the broader market has rapidly expanded, costing taxpayers billions in unrealized returns and threatening the financial stability of the $78 billion pension system. The state’s pension funding shortfalls — which have been exacerbated by Christie’s market-trailing investment strategy — were one of the factors cited by Fitch Ratings in its decision last week to downgrade the state’s bond rating for the second time.

………

“The idea that hedge funds, private equity funds and other alternative investments beat stock-index funds over the long haul is an urban myth like the tooth fairy,” said Jeff Hooke, a former Lehman Brothers investment banker who in 2012 published a study showing that higher alternative investment fees correlated to lower pension returns. “The managers of these big state pension funds are drinking the Wall Street Kool-Aid. The problem with these alternative investments is that they have a tough time beating the low-fee index funds because the fees for alternatives are so big.”

Even without considering fees, cheap (a 90% lower expense ratio) index funds outperform the aggressively managed money.

When you add in the rapacious fees charged, it’s not even close.

This lack of performance, and his refusal to make necessary pension payments earned him a downgrade from S&P as well:

In a significant blow to Gov. Chris Christie, Standard & Poor’s on Wednesday said it is downgrading New Jersey’s credit rating. The announcement said Christie’s management of New Jersey’s $78 billion pension system has “significant negative implications” for the state’s finances. S&P also cited the state’s below-expected tax revenues as a factor that “put additional pressure on future budgets.” The downgrade comes as Christie aides have been publicly suggesting that the governor’s fiscal-management record would be a boon should he decide to run for president in 2016.

Bloomberg News notes this is the eighth downgrade during Christie’s tenure and the Washington Post reports that “New Jersey’s credit rating has been downgraded more under Chris Christie than any other governor” in the United States.

Neither Christie’s office nor the New Jersey Department of Treasury responded to emails from International Business Times requesting comment about the S&P downgrade.

Citing Christie’s decision to not make actuarially required pension payments that he had previously agreed to, S&P’s downgrade announcement says New Jersey has “demonstrated [a] lack of commitment when it comes to funding its annual contributions.” S&P says it expects the pension system’s finances “to decline much more significantly” in the coming years.

BTW, there has been a formal ethics complaint fired on his pension policies:

New Jersey’s biggest labor union today plans to file a complaint with the State Ethics Commission against a key adviser to Gov. Chris Christie who is in charge of the agency that oversees pension investments.

In an 11-page letter to the ethics commission, New Jersey AFL-CIO President Charles Wowkanech said that the chair of the State Investment Council, Robert Grady, “has violated the Division’s own rules barring politics in the selection and retention of such funds and investments, and has further created an appearance of impropriety.”

At issue is the state’s investment of hundreds of millions of dollars of pension money with Wall Street firms, including hedge funds and other types of “alternative investments” that charge higher fees than more traditional types of investments — a practice that started before Christie was governor but has increased under him.

Some “key executives” of the firms donated to state and national Republican organizations that helped Christie, according to Wowkanech, who said those donations potentially broke state pay-to-play laws, and at the least violated the state officials’ code of ethics. Wowkanech wants an investigation.

And on top of all this, it now appears that the Christie administration is using fuzzy math to goose their return on investment.

It’s clear that Christie has moved from bombast to damage control in this matter:

The New Jersey Division of Investments has quietly sold its stake in a venture capital fund managed by General Catalyst Partners, following allegations of impropriety related to a political contribution from General Catalyst “executive-in-residence” and current Massachusetts gubernatorial candidate Charlie Baker.

Fortune has learned that the sale agreement was inked back in August, and closed within the past several weeks. It may be publicly disclosed tomorrow during an open State Investment Council meeting, and was discussed during an investment policy committee call last week. No word yet on the buyer, although a source says that the sale price was around 1.5x of cost.

I so hope that this guy runs for President.

The scrutiny he’ll get will destroy any future for him in politics.

This is the Proverbial, “Big F%$#ing Deal”

The largest pension fund in the nation, Calpers, has decided that it will not longer have hedge funds manage its money:

The California Public Employees’ Retirement System, the nation’s largest pension fund, will eliminate all of its hedge fund investments over the next year on concerns that investments are too complicated and expensive.

The pension fund, which oversees $300 billion, said on Monday that it would liquidate its positions in 24 hedge funds and six hedge fund-of-funds — investments that total $4 billion and more than 1 percent of its total investments under management.

The decision, after months of deliberation by the pension fund’s investment committee, comes as public pensions across the United States are beginning to assess their exposure to hedge funds. It is likely to reverberate across the investment community in the United States, where large investment funds look to Calpers as a model because of its size and the sophistication of its investments.

“Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost and the lack of ability to scale at Calpers’ size,” the hedge fund program “doesn’t merit a continued role,” Ted Eliopoulos, the interim chief investment officer of Calpers, said in a statement.

Typically, hedge funds charge 2% of the fund plus 20% of any appreciation.

By comparison, Vanguard’s S&P 500 index fund has an expense ratio of 0.17%, and it turns out that they don’t generally outperform index funds, so you are not getting alpha (beating the market), and notwithstanding their protestations to the contrary, they don’t deliver lower volatility (beta) either, as is evidenced by the frequency that the almost cliched phrase, “Once high flying hedge fund,” appears in the financial press.

The reason that this is a big deal is not that this is a huge change in policy by Calpers, it only had a bit over 1% of its assets managed by hedge funds, but there are a lot of other public pensions out there that follow its lead, and if they start bailing, the hedgies will have to find honest work to make a living.

H/t naked capitalism, which had the best quote on the possibility of pension funds bailing on hedge funds:

One of my interlocutors said “OMG, hedgies will be jumping out of floor to ceiling windows in fancy modern building after throwing artsy pieces of modern furniture through them. There aren’t enough dumb enough rich investors to go around once the hedgies have lost the pension fund business. Short yachts, watch markers, GT cars, and Greenwich real estate.”

Look out below.

It’s gonna be raining Katz and Goldmans and Sachs.

The Revolving Door Spins Again

A Russian bank targeted by US sanctions, has hired Trent Lott and John Breaux as lobbyists:

Gazprombank GPB (OJSC), a Russian bank targeted with sanctions by President Obama over the Ukraine crisis, has hired two former U.S. senators to lobby against those sanctions, according to a new disclosure filed with the Senate.
Gazprombank is controlled by Russia’s state-owned energy company Gazprom, the country’s largest gas producer; it supplies about a third of Europe’s natural gas.

In a filing submitted Friday and effective that day, former Senate Majority Leader Trent Lott, R-Miss., and former Senator John Breaux, D-La., are listed as the main lobbyists under the Gazprombank account for the firm Squire Patton Boggs, lobbying on “banking laws and regulations including applicable sanctions.”

Truth be told, the fact that these two are lobbying for Gazprombank is not the real problem, it is the fact that they never went home, and are now paid obscene amounts of money as employees of Squire Patton Boggs (BTW, the Boggs in the name of the firm is Thomas Hale Boggs, Jr., son of Thomas Hale Boggs, Sr., former House Majority Leader).

More back loaded bribery of our elected officials.

Arbitration is a Corrupt Fraud

This little story of the corruption that is a feature, not a bug, of the arbitration process has made it to the New York Times:

Five years ago, Sean Martin, a registered representative at Deutsche Bank Securities in New York, saw something troubling on his trading desk.

A few of his colleagues, he said, were letting preferred hedge fund clients listen in on confidential market commentary by the firm’s analysts before their views were made public. He alerted his superiors and was almost immediately given a negative review, a first in more than 10 years at the firm, he said. His bosses also removed him from the group he’d been working with and cut his compensation.

Mr. Martin, who continues to work at Deutsche Bank, said he believed that he was being punished for reporting misconduct and took the one avenue of redress that was open to him. In August 2012, he brought an arbitration case against the firm, contending retaliation and asking to recover his lost earnings. As is typical in the financial industry, his employment contract required that any dispute between him and his employer go through private arbitration, not the courts. Mr. Martin’s matter is being heard by three arbitrators associated with the Financial Industry Regulatory Authority, a self-regulatory organization that operates the largest dispute resolution forum in the securities industry.

But Mr. Martin’s experience with arbitration, both he and his lawyer say, has raised questions of fairness in the process. The three-member panel hearing his case has barred him from testifying about certain crucial aspects of what he saw at Deutsche Bank and disallowed the introduction of documents that bolster his claims. This led his lawyer to conclude that the panel was not interested in specifics of the behavior at the heart of his accusations — and to ask a state court to step in.

“When I filed this arbitration, I expected that Finra would resolve the dispute between Deutsche Bank and me in a fair way,” Mr. Martin, 41, said in a statement provided by his lawyer. “I was surprised and disappointed when the arbitrators refused to listen to important parts of what I wanted to say and rejected or redacted my exhibits. I can’t see how a dispute can be fairly resolved if one party is not even allowed to tell their side.”

………

“How can a panel of arbitrators for the regulator justify not hearing evidence of wrongdoing?” asked Robert Kraus, a partner at Kraus & Zuchlewski in New York, who represents Mr. Martin. “It is completely upside-down.”

………
But Mr. Kraus, worried that his client would not get a fair hearing, last week filed a motion in New York State Supreme Court asking to stay the arbitration hearings. Arguments are on the docket for Wednesday in Manhattan. If the judge grants Mr. Kraus’s request, the court will hear arguments on whether the arbitrators should be removed.

………

Mr. Kraus said he did not take the decision lightly to file his request with the court. He said he’s had success in other Finra arbitrations over the years but that this case was different.

“Unlike other hearings where you question a ruling here and there, these arbitrators repeatedly excluded evidence that lies at the heart of our case,” Mr. Kraus said. “From time to time, you get these panels that go off the rails, and then the question is how do you remedy that?”

This is not surprising.

The private arbitration system is inherently corrupt.

The continued employment of arbitrators is dependent upon satisfaction the firms, and not the employees of customers, so their rulings invariably favor the big corps, at the expense of due process for the little guys.

Why Ignoring the Marine Insurance Act of 1746 is a Bad Idea, Part MCMXXVII

For those who don’t remember, the Marine Insurance Act of 1746 required, “Anyone seeking to collect on an insurance contract to have an interest in the continued existence of the insured property.” (Link)

Basically, it means that you cannot purchase insurance on your neighbors home, and collect when you burn it down.

The act was passed because around that time, there was a war between Britain and France, and some people were purchasing insurance on ships, and then send the itinerary and manifest to accomplices in France, who would relay this information to the French navy, who would seize the ship, and the insurance fraudster and his accomplish would divide the spoils.

In 1999, it was decided that the form of insurance known as a Credit Default Swap wasn’t insurance, because, well ……… because.

As a result, we have seen an explosion in speculators who insure things, and then blow them up.

Well it now appears that the Vulture funds who pushed Argentina into default may have engaged in this strategy:

So for Elliott an unseemly legal victory may not mean cold cash. Fear of default and/or eagerness to please Argentina may prompt some in the financial community to buy them out at a good price, but a sure thing that is not. Whatever American courts say, for all the reasons above, Argentina will probably not settle. Those bonds bought cheap (according to sources, Elliott spent close to $50 million purchasing about $220 million of old Argentinian bonds in 2008) may have looked to an informed observer beforehand quite unlikely to produce a decent return.

So why bother with an exorbitant legal fight? Well, the CDS route would be one reason. The likelihood of CDS triggering (failure to pay on foreign exchange bonds) would have appeared as very high precisely for all the reasons that make the likelihood of a settlement so low.

This scenario may have seemed plausible, at least more so than expecting Argentina to pay holdouts in full or something close to it. Elliott may have known payment is a long shot, but being a bondholder at least lets it try for a legal solution that could lead to default. That pari passu had been breached would have been a no brainer, for “all” you needed was to show that the country had legally subordinated you versus other creditors, and Argentina did that in 2005 by passing the so-called Lock Law prohibiting itself from making good on the holdouts (this was a key argument to have the courts declare a breach of pari passu; apparently, this kind of explicit de jure discrimination-subordination of creditors is very unusual).

Obtaining ratable payment as a remedy is unusual, though not unprecedented, but may have seemed like good odds in this case given the specific wording of the pari passu clause in question (which seemed to call for equal payments and not just equal rank) and the uniquely uncooperative character of the debtor; from reading the courts´ statements, one can sense that discomfort with the country´s attitude forced the judges´ hands towards a solution that in any other case may have seemed too harsh. Argentina´s behavior presented a unique opportunity to persuade a court to impose ratable payments; discipline for an unruly country.

With hindsight, Argentina was the perfect collaborator to have the CDS trigger: the Lock Law, tirades against holdouts, and contempt for court rulings on the way to its final refusal to settle guarantee that a failure to pay event materialised. For all the Kirchner government rage against speculators, in what would be a delicious paradox, it may have made the vultures rich by triggering the CDS.

This is actually a higher percentage strategy than getting 100¢ on the dollar from Argentina.

They make money, and in the process, they inflict enormous pain on the people of Argentina, and does damage to the US as a venue for sovereign debt.

I’m with Paul Volker when he said only the worthwhile innovation of this generation was the ATM.

This is a Big Deal

Standard Charter bank has just agreed to pay a $300 million fine for money laundering, which really is pocket change, but they have also had their dollar clearing rights suspended which is a very big deal:

British banking giant Standard Chartered is a repeat offender, at least in the eyes of New York’s top financial regulator, which fined the bank $300 million and suspended its ability to convert currency for violating a money laundering settlement.

On Tuesday, the New York Department of Financial Service said Standard Chartered had not flagged a series of wire transfers from clients and locales at high risk for money laundering, running afoul of a 2012 agreement the bank inked with the regulator. Back then, the bank shelled out a total of $667 million to state and federal authorities for allegedly processing $250 billion in transactions for Iranian banks in violation of U.S. sanctions.

The suspension of dollar clearing privileges means that they can no longer transfer dollars into and out of the United States on their own, but have to use an intermediary who still has dollar clearing privileges, which adds cost and complexity, which serves to blow a huge hole in their business, since most transaction settle in dollars.

Benjamin Lawsky, head of the NY Department of Financial Service is arguably the most aggressive, and most effective, financial regulator in the US right now.

Yves Smith at Naked Capitalism believe that these actions have the potential to uncover the systemic rot in our banking system, but I am not as optimistic as she it.
In any case, more of this.

We Learned Nothing from the California Energy Crisis

It’s Enron all over again, as energy traders loot the ratepayers through the magic of the market:

By 10 a.m. the heat was closing in on the North Shore of Long Island. But 300 miles down the seaboard, at an obscure investment company near Washington, the forecast pointed to something else: profit.

As the temperatures climbed toward the 90s here and air-conditioners turned on, the electric grid struggled to meet the demand. By midafternoon, the wholesale price of electricity had jumped nearly 550 percent.

What no one here knew that day, May 30, 2013, was that the investment company, DC Energy, was reaping rewards from the swelter. Within 48 hours the firm, based in Vienna, Va., had made more than $1.5 million by cashing in on so-called congestion contracts, complex financial instruments that gain value when the grid becomes overburdened, according to an analysis of trading data by The New York Times.

Those profits are a small fraction of the fortune that traders at DC Energy and elsewhere have pocketed because of maneuvers involving the nation’s congested grid. Over the last decade, DC Energy has made about $180 million in New York State alone, The Times found.

………

The contracts were intended to protect the electricity producers, utilities and industries that need to buy power. The thinking was that the contracts would help them hedge against sharp price swings caused by competition as well as the weather, plant failures or equipment problems. Those lower costs could reduce consumers’ bills.

But Wall Street banks and other investors have stepped in, siphoning off much of the money. In New York, DC Energy accounted for more than a quarter of the total $639 million in profits in the congestion markets between 2003 and 2013, The Times found. Some of DC Energy’s biggest paydays involved Port Jefferson, a village 60 miles east of Manhattan. Because of the geography of the grid, moving power from one point to another means demand often briefly outstrips supply here.

“Why aren’t we getting that money?” said Margot Garant, mayor of Port Jefferson. City officials, including the mayor, had not heard of DC Energy before they were told about it by The Times.

DC Energy — and its profits — are an unexpected result of the deregulation of the nation’s electric grid. The idea behind deregulation was to eliminate old monopolies and create robust, competitive markets that would encourage investment and ultimately lower costs for consumers. But in most places, electricity bills have been rising, not falling. While fuel prices, taxes and fees have added directly to the costs, Wall Street-style traders have contributed in subtle ways by turning new markets, like the trading of congestion contracts, to their advantage, The Times analysis found.

The contracts have attracted big money: More than $2 billion has been invested nationwide in the monthly auctions for contracts since 2011, according to Platts, a trade publication.

This is ALWAYS what happens when the decision is made to use the magic of the market instead of regulators.

The banksters figure out a way do rape us like a bunch of passed out sorority girls.

This sort of inherently parasitic behavior is what gave Timothy Geithner an erection when he waxes nostalgic about the increasing financialization of our economy.

This is F%$#ed Up and SH%$

Private equity companies are worried about regulations on insane levels of leverage, so they are lobbying organizations that don’t even regulate them:

The private equity industry’s lobbying group met officials from the Office of the Comptroller of the Currency and the Federal Reserve last week to address concerns over a crackdown on junk-rated loans, people familiar with the matter said on Monday.

The private meeting – the first between the Private Equity Growth Capital Council (PEGCC) and the U.S. regulators over the issue – underscores many buyout firms’ reliance on leveraged loans for outsized returns in their debt-fueled acquisitions of companies.

It also highlights the willingness of the OCC and the Fed to engage with parties they do not regulate. Private equity firms are typically regulated by the U.S. Securities and Exchange Commission.

Seriously. What has got them worried? Has the SEC, the Stay Puft Marshmallow Man, been too hard on them?

I get it. You are pillaging barbarians, and your weapon is other people’s money.

You need insane levels of leverage so that you can make your money by shutting down factories, moving production overseas, charging excessive fees to “manage” your acquisitions, etc.

Clearly, you need assurances that no one will ever prevent you from doing this, because anything that might get in the way of your f%$#ing the rest of us would be an affront to  the gods of the market.

Not enough bullets.

I am Actually Familiar With the Turkish Cleric and His Charter Schools

One of his charter schools is Chesapeake Science Point Public Charter School, which holds a Rubik’s cube competition, and so I’ve been down there a couple of times, and it seemed a bit different, so I Googled it, and discovered that it was a part of the Gülen movement schools, which is led by Fethullah Gülen, a Turkish preacher living in self-imposed exile in the United States.

To be clear, Chesapeake Science Point is not a religious schools in any way shape or form, it’s more of an international school.

One of the interesting things that I discovered about this is that Fethullah Gülen is an ally turned opponent of Islamist PM (now President) of Turkey, Recep Tayyip Erdoğan, despite his residing in Pennsylvania.

So, I found it rather interesting when The Atlantic found the movement, and looked at the schools. The initial discussion is measured and anodyne:

It reads like something out of a John Le Carre novel: The charismatic Sunni imam Fethullah Gülen, leader of a politically powerful Turkish religious movement likened by The Guardian to an “Islamic Opus Dei,” occasionally webcasts sermons from self-imposed exile in the Poconos while his organization quickly grows to head the largest chain of charter schools in America. It might sound quite foreboding—and it should, but not for the reasons you might think.

You can be excused if you’ve never heard of Fethullah Gülen or his eponymous movement. He isn’t known for his openness, despite the size of his organization, which is rumored to have between 1 and 8 million adherents. It’s difficult to estimate the depth of its bench, however, without an official roster of membership. Known informally in Turkey as Hizmet, or “the service”, the Gülen movement prides itself on being a pacifist, internationalist, modern, and moderate alternative to more extreme derivations of Sunni Islam. The group does emphasize the importance of interfaith dialogue, education, and a kind of cosmopolitanism. One prominent sociologist described it as “the world’s most global movement.”

Much of the praise for the Gülen movement comes from its emphasis on providing education to children worldwide. In countries like Pakistan, its schools often serve as an alternative to more fundamentalist madrassas. Gülen schools enroll an estimated two million students around the globe, usually with English as the language of instruction, and the tuition is often paid in full by the institution. In Islamic countries, where the Gülen schools aren’t entirely secular: The New York Times reported that in many of the Pakistani schools, “…teachers encourage Islam in their dormitories, where teachers set the example in lifestyle and prayers.” But the focus is still largely on academics. Fethullah Gülen put it in one of his sermons, “Studying physics, mathematics, and chemistry is worshipping Allah.”

In Western countries such as the United States, Germany, and France, there isn’t any evidence whatsoever that the nearly 120 Gülen charter schools in America include Islamic indoctrination in their curriculum. The schools are so secular that singling out the Gülen schools as particularly nefarious, simply for being run predominantly by Muslims, smacks of xenophobia.

He appears to be running modernist schools, some secular, and some Islamic (not Islamist).

The next part is interesting to me because, once it gets into the nitty gritty of charter schools, as in pretty much every case where I have looked into charter schools, the finances become disturbing:

However, these schools might be suspect for reasons that are completely unrelated to Islamic doctrine. One of their most troubling characteristics is that they don’t have a great track record when it comes to financial and legal transparency. ……… Furthermore, as the Deseret News reported, the school’s administrators seemed to be reserving coveted jobs for their own countrymen and women: “In a time of teacher layoffs, Beehive has recruited a high percentage of teachers from overseas, mainly Turkey.”

………

There are similar stories from other states. In Texas, where 33 Gülen charter schools receive close to $100 million a year in taxpayer funds, the New York Times reported in 2011 that two schools had given $50 million to Gülen-connected contractors, including the month-old Atlas Texas Construction and Training, even though other contractors had offered lower bids. It was the same thing in Georgia, where Fulton County audited three Gülen schools after allegations that they’d skipped the bidding process altogether and paid nearly half a million dollars to organizations associated with the Gülen movement.

………

There are similar stories from other states. In Texas, where 33 Gülen charter schools receive close to $100 million a year in taxpayer funds, the New York Times reported in 2011 that two schools had given $50 million to Gülen-connected contractors, including the month-old Atlas Texas Construction and Training, even though other contractors had offered lower bids. It was the same thing in Georgia, where Fulton County audited three Gülen schools after allegations that they’d skipped the bidding process altogether and paid nearly half a million dollars to organizations associated with the Gülen movement.

Let’s be clear here: This is actually typical behavior within the Charter school movement, as Diane Ravich notes when contacted by The Atlantic:

………Diane Ravitch, education professor at New York University and Assistant Secretary of Education under George H.W. Bush, writes about this larger transparency issue in her latest book, Reign of Error, explaining, “In 2009, New York Charter School Association successfully sued to prevent the state comptroller from auditing the finances of charter schools, even though they receive public funding. The association contended that charter school’s are not government agencies but ‘non-profit educational corporations carrying out a public purpose.’” The New York State Court of Appeals agreed with the organization in a 7 to 0 vote. It took an act of legislation from the state—specifically designed to allow the comptroller to audit charter schools—for this to change.

Ravitch also writes of a similar instance in North Carolina in which the state, urged on by lobbying giant ALEC (American Legislative Exchange Council), proposed the creation of a special commission, composed entirely of charter school advocates, as a way for charter schools to bypass the oversight of the State Board of Education or the local school boards. Ravitch writes, “The charters would not be required to hire certified teachers. Charter school staff would not be required to pass criminal background checks. The proposed law would not require any checks for conflicts of interest—not for commission members or for the charter schools.” In other words, it isn’t the Gülen movement that makes Gülen charter schools so secretive. It’s the charter school movement itself.

It turns out that the Gülen schools got raided by the FBI for steering money from the E-Rate program to favored contractors: (One wonders if the FBI, who has employed nut-job Islamophobic consultants, would have bother to investigated if the target wasn’t Islamic)

This comes across in the latest news story related to the Gülen schools: an FBI raid last month on the headquarters of over 19 Gülen-operated Horizon Science Academies in Midwest. According to search warrants obtained by the Chicago Sun-Times, federal authorities were interested in gathering general financial documents and records of communication. The warrant specifically mentions something called the E-rate program—a federal program that, according to the Sun-Times, “pays for schools to expand telecommunications and Internet access.” A handful of the Gülen-affiliated contractors assisting the schools were receiving money from this federal fund. It’s difficult speculate what this could all mean, as all documents pertaining to the investigation, save the warrants themselves, have been sealed from the public.

And then there is Ohio:

I contacted Matthew Blair, and he told me that the problems with the Gülen schools were merely symptomatic of a larger problem within the state’s education system. “The charter school system in Ohio is broken beyond repair,” he wrote in an email. “As it is, charter schools operate in a lawless frontier. Regulations are few and far between. Those that exist are consistently and consciously overlooked.”

The Gülen schools, he wrote, “are an excellent example” of this problem: “A Gülen organization controls the real estate companies that own their schools. They charge rent to their own schools and tax-payers foot the bill. They refuse to answer public records requests, falsify attendance records, and cheat on standardized tests. Yet, Ohio continues to grant them charters to operate.” He added, “It doesn’t hurt that the Gülen organization is politically active and treats state politicians to lavish trips abroad.” But overall, he said, “this Wild West atmosphere of few regulations creates incestuous relationships among politicians, vendors, and schools. Charter schools like Gülen’s give generously. In return, they are allowed to keep their saloons open and serve whatever they want. The only way to save the charter school system is to start over again by using the model of effective public schools.”

Let me reiterate: This is not a problem specific to the Gülen Schools. This is the standard way that charter schools do business.

I have already wrote about how Rocketship Schools loots taxpayer fund by paying exorbitant prices for software from a for-profit firm whose owners constitute a bulk of the board of directors of the nominally non profit schools, and the real-estate shenanigans are pretty much standard fare.

Charter schools as they are implemented in the United States are a remarkably criminogenic manner.

Man Who Works Sucking the Marrow out of the Economy Is Hired to Suck the Marrow out of the LA Times

At least, there is symmetry.

That sound that you hear is the legendary publisher Otis Chandler spinning in his grave:

The Los Angeles Times has named Austin Beutner, a former deputy mayor of Los Angeles and Wall Street banker, as its new chief executive and publisher.

The appointment, announced on Monday, comes a week after The Times’s parent, the Tribune Company, spun off its newspapers into a separate publicly traded company called Tribune Publishing.

Mr. Beutner, 54, a former partner at the private equity firm Blackstone Group and a co-founder of the investment bank Evercore Partners, most recently worked as Los Angeles’s deputy mayor of economic development. He also explored a run for mayor and was once reported to be a possible buyer of The Los Angeles Times alongside the billionaire Eli Broad.

Jack Griffin, Tribune Publishing’s new chief executive, noted in a statement how these experiences would help Mr. Beutner in his new role.

………

Mr. Beutner is taking over The Los Angeles Times at a major transitional point for its parent company, Tribune. After Tribune braved years of bankruptcy proceedings and threats of takeover by eager buyers, The Los Angeles Times, along with its fellow Tribune-owned papers like The Chicago Tribune, split from Tribune’s television stations into a separate company. But print institutions like The Los Angeles Times now face a brutal time for newspapers as more readers consume the news online.

And this guy won’t be helping.

He is there is to exsanguinate the LA Times, much like any vampire squid in finance.

Think what Mitt Rmoney did at Bain.

Not My Choice, but It’s a Start

This post was corrected on 26 January, 2016.  

Dr. Dirk Markus has no connection to Aurelius Capital Management LP, the vulture fund in question.  

He is  the CEO of Aurelius Equity Opportunities, which is a completely unrelated financial firm, and is not involved with the attempted looting of Argentina in any way.

My apologies. 

Argentina is going to the International Court of Justic in the Hague:

Argentina has asked the international court of justice (ICJ) in The Hague to take action against the United States over an alleged breach of its sovereignty as it defaulted on its debt.

Argentina defaulted last week after losing a long legal battle with hedge funds that rejected the terms of debt restructurings in 2005 and 2010.

A statement issued by the ICJ, the United Nation’s highest court for disputes between nations, said Argentina’s request had been sent to the US government. It added that no action will be taken in the proceedings “unless and until” Washington accepts the court’s jurisdiction.

The US has recognised the court’s jurisdiction in the past, but it was not immediately clear if it would do so in Argentina’s case.

I guess that this is one avenue to take, though I think that the Argentinean investigation into possible violation of their laws by the vulture funds would likely be a better course of action:

Argentina’s markets watchdog on Monday launched an investigation into what it believes may have been unlawful speculation by holdout creditors whose litigation against the country for repayment of their defaulted bonds pushed it into a new default last week.

………

The head of Argentina’s Securities Commission Alejandro Vanoli said it had asked its U.S. counterpart for information on trade of Argentina’s sovereign debt and credit default swaps (CDS), derivatives used to insure against default.

The watchdog wanted to check if holdouts who rejected Argentina’s restructuring in the wake of its 2002 default held or traded CDS while they took part in negotiations with Argentina which could trigger a default.

“The use of insider information, which would be the case here, and market manipulation are crimes in Argentina, they are crimes in the United States, and they imply economic sanctions and eventually criminal sanctions,” Vanoli told a news conference.

While they might prevail at the ICJ, it is by no means a certainty, and it is also an open question as to whether or not the US government will obey that foreign court.

On the other hand, a prosecutor can indict a ham sandwich, and once they have file for extradition of the vulture funds senior staff.

Additionally, they could put a bounty on their heads, and if they were to promise a few million dollars for the apprehension and rendering of these people back to Argentina, you could be guaranteed that the pucker factor would skyrocket.

Additionally, it would be legal under US law, which grants extraordinary powers to bounty hunters.

If Argentina can win this, we deter from vulture fund f%$#ery, particularly if Mark Brodsky is delivered to Buenos Aires in chains with hoods over their heads.

Federal Reserve and FCIC Reject TBTF Banks’ “Living Will”

To (mis)quote Bette Davis, “Fasten your seat belts. It’s going to be a bumpy ride,” because the regulators are claiming that the big banks contingency plans are worthless and leave the taxpayers on the hook:

Congress’s overhaul of the financial system aims to reshape large banks so that if they get into trouble they can descend into an orderly bankruptcy that does not set off a wider panic.

But on Tuesday, two regulators, the Federal Reserve and the Federal Deposit Insurance Corporation, sharply criticized the plans that the banks have prepared for winding themselves down in a controlled fashion. The F.D.I.C. said that it had determined that the so-called living wills were “not credible.”

The agencies have sent letters to 11 banks, including JPMorgan Chase and Goldman Sachs, pointing out perceived shortcomings in the resolution plans that they submitted in 2013. The agencies demanded that the banks make improvements in living wills they submit for 2015.

“Despite the thousands of pages of material these firms submitted, the plans provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support,” Thomas M. Hoenig, the vice chairman of the F.D.I.C., said in a statement.

I am so not surprised by this.

The banksters aren’t providing meaningful “Living Wills” because it is in their interest not to do so.

Having a meaningful bankruptcy wind down plan means that, if something goes wrong, their stock options becomes worthless, and they probably lose their jobs, but if Uncle Sam is forced to bail them out, there is a pretty good chance that they get to keep their jobs and their hefty pay packages.

After all, that is what happened last time around.

The regulators should get tough with the banks:

If the banks do not make satisfactory changes, the regulators could take action, including requiring banks to sell units to shrink and simplify their corporate structures if they failed to comply with other orders, officials of the agencies said.

The regulators should give a reasonable amount of time (I would suggest 4 weeks, so that Congress won’t be back in session), and if they do not see a complete and meaningful plan, they should start breaking them up.

BTW, the big problem here is what Warren Buffet calls, “Financial weapons of mass destruction,” derivatives:

In suggesting areas the banks need to focus on, the regulators highlighted derivatives, which played a central and destabilizing role in the 2008 crisis. Derivatives can complicate bank resolutions because they may require collapsing banks to make payments to derivatives holders before other clients and creditors.

Unfortunately, derivatives allows financial institution to increase their leverage while technically staying properly capitalized.

They aren’t properly capitalized, of course, which is why the US government had to bail out AIG so that it could pay their insurance claims at 100 cents on the dollar.

It’s going to happen again, and no one is going to jail, again.

It sucks.

The right thing to do is for the Federal Reserve and the FDIC to break up the banks, as it always has been, but the banks own Washington, so it ain’t going to happen.

H/t Naked Capitalism.

If Mario Cuomo were Dead, He’d Be Spinning in His Grave

I am not a big fan of New York Governor Andrew Cuomo. (See my post F%$# Andrew Cuomo)

Well, in addition to his fervent retreat from anything resembling economic liberalism, unless it is of the Neoliberal variety, we now know that he’s a corrupt hypocrite.

In the small change category, we have the fact that while he was a “crusading” Attorney General, his primary adviser for mortgage fraud by the banksters was a lobbyist for the mortgage banksters:

In early 2007, when he was New York State attorney general, Andrew Cuomo brought on a longtime confidant as a consultant on mortgage industry investigations, a move that has gone undisclosed until now.

The friend was Howard Glaser and he had another job at the same time: consultant and lobbyist for the very industry Cuomo was investigating.


Glaser, who went on to become a top state official in Cuomo’s gubernatorial administration, was operating a lucrative consulting firm, the Glaser Group, with a host of mortgage industry clients.

Later that year, Glaser provided insights on Cuomo’s investigations to industry players on a conference call hosted by an investment bank.

Cuomo’s office ended up giving immunity to one of Glaser’s clients a year into his term as attorney general.

In the end, experts say, the mortgage investigations Cuomo touted as “wide-ranging” came to little, even as he held one of the country’s most powerful prosecutorial positions through the financial crisis and its aftermath.

(emphasis mine)

Not surprising, though the story of how the denial of a Freedom of Information Act accidentally let the cat out of the bag to Pro Publica is prize.

The bigger story is how Cuomo set up an anti-corruption commission, and then shut it down when it began to point in his diriection:

With Albany rocked by a seemingly endless barrage of scandals and arrests, Gov. Andrew M. Cuomo set up a high-powered commission last summer to root out corruption in state politics. It was barely two months old when its investigators, hunting for violations of campaign-finance laws, issued a subpoena to a media-buying firm that had placed millions of dollars’ worth of advertisements for the New York State Democratic Party.

The investigators did not realize that the firm, Buying Time, also counted Mr. Cuomo among its clients, having bought the airtime for his campaign when he ran for governor in 2010.

Word that the subpoena had been served quickly reached Mr. Cuomo’s most senior aide, Lawrence S. Schwartz. He called one of the commission’s three co-chairs, William J. Fitzpatrick, the district attorney in Syracuse.

“This is wrong,” Mr. Schwartz said, according to Mr. Fitzpatrick, whose account was corroborated by three other people told about the call at the time. He said the firm worked for the governor, and issued a simple directive:

“Pull it back.”

The subpoena was swiftly withdrawn. The panel’s chief investigator explained why in an email to the two other co-chairs later that afternoon.

“They apparently produced ads for the governor,” she wrote.

The pulled-back subpoena was the most flagrant example of how the commission, established with great ceremony by Mr. Cuomo in July 2013, was hobbled almost from the outset by demands from the governor’s office.

………

While the governor now maintains he had every right to monitor and direct the work of a commission he had created, many commissioners and investigators saw the demands as politically motivated interference that hamstrung an undertaking that the governor had publicly vowed would be independent.

………

But a three-month examination by The New York Times found that the governor’s office deeply compromised the panel’s work, objecting whenever the commission focused on groups with ties to Mr. Cuomo or on issues that might reflect poorly on him.

Ultimately, Mr. Cuomo abruptly disbanded the commission halfway through what he had indicated would be an 18-month life. And now, as the Democratic governor seeks a second term in November, federal prosecutors are investigating the roles of Mr. Cuomo and his aides in the panel’s shutdown and are pursuing its unfinished business.

………

Mr. Cuomo said early on that the commission would be “totally independent” and free to pursue wrongdoing anywhere in state government, including in his own office. “Anything they want to look at, they can look at — me, the lieutenant governor, the attorney general, the comptroller, any senator, any assemblyman,” he said last August.

In a 13-page statement responding to The Times’s questions, Mr. Cuomo’s office defended its handling of the commission. It said the commission was created by and reported to the governor, and therefore he could not be accused of interfering with it.

While he allowed the commission the independence to investigate whatever it wanted, the governor’s office said, it would have been a conflict for a panel he created to investigate his own administration.

That last bit is, dare I say it, Nixonian in its phrasing.

Read the whole article, it’s pretty long, and you cannot help but come away with the impression that Cuomo quashed an investigation because it came too close to him and his.

Rather unsurprisingly, the United States attorney for the Southern District of New York has expressed similar concerns:

Federal prosecutors investigating Gov. Andrew M. Cuomo’s shutdown of an anticorruption commission have subpoenaed the assistant to its former executive director to testify before a grand jury in Manhattan, suggesting that the criminal inquiry has moved to a new stage, people briefed on the matter said on Thursday.

Federal agents served the subpoena on the assistant, Heather Green, on Wednesday morning, appearing at her doorstep before 7 a.m., the people said. Ms. Green, who is not believed to be a target of the inquiry, worked as an executive assistant to the anticorruption panel’s former executive director, Regina Calcaterra, until Mr. Cuomo announced he was disbanding the panel, known as the Moreland Commission, on March 29.

The subpoena, according to two people who have seen it or been briefed on its contents, asked for documents and correspondence, including any communications with Mr. Cuomo and his senior aides. It also directed Ms. Green to appear July 28 to testify before a grand jury in Manhattan, the people said.

Separately, Mylan L. Denerstein, counsel to the governor, has agreed to be interviewed in early August by federal prosecutors about her involvement with the panel, one of the people said.

Mr. Cuomo created the Moreland Commission in July 2013, saying he wanted to root out corruption and reform state laws that for decades have enabled it. But he abruptly shuttered the panel in March after striking a deal with legislative leaders that netted only modest reforms.

The governor said at the time that in exchange for terminating the panel’s work, he had won tougher laws on bribery and corruption and improved enforcement of election law. But the action angered Preet Bharara, the United States attorney for the Southern District of New York. Mr. Bharara appeared on a radio show days later and, in an unusual move, sharply criticized Mr. Cuomo’s decision, saying his actions made it appear as though the governor had bargained away corruption cases as part of a political deal.

(emphasis mine)

Cuomo’s opponent in the Democratic primary, Zephyr Teachout (her birth name, her parents are very bad people) has gone from demanding answers to calling for his resignation.

Political realities being what they are, Ms. Teachout has no chance of winning, and Cuomo is likely to win the general by at least 20 points, we will almost certainly see 4 more years of his conservative f%$#ery, but I think that he is now officially out of the running for President 2016, and hopefully forever.