Category: Finance

Can We Please Start Arresting Bankers?

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Seriously, the good folks at Citi are planning to start selling, “derivatives intended to pay out in the event of a financial crisis.”

That’s right, they are creating instruments that will allow people to bet against our financial system, and win if they, or their friends take it down:

Credit specialists at Citi are considering launching the first derivatives intended to pay out in the event of a financial crisis. The firm has drawn up plans for a tradable liquidity index, known as the CLX, on which products could be structured that allow buyers to hedge a spike in funding costs.

(emphasis mine)

Seriously, if our forfathers understood the need to prevent this sort of casino gambling masquerading as insurance when the parliament passed the Marine Insurance Act of 1746, no that’s not an error, taking out insurance on something in which you have no interest in the continued existence of the insured property has been illegal for 264 years, because otherwise, people do things like take out insurance in their neighbor’s house, and then burn it down.

These people are terrorists under the (admittedly lax) standards of the PATRIOT act and its successors, and they should be pursued as such, with all the jurisprudence that Dick Cheney wants for suspected al Qaeda members.

H/t Felix Salmon, who crystallizes the basic point rather clearly:

We learned in the crash of 1987 [and 2001, and 2008, me] that when financial markets start selling products which insure a portfolio against catastrophic loss, the very existence of those products can destabilize the market and make it more prone to crashing. And, of course, we learned that such insurance has a tendency not to get paid out on exactly when it’s most needed. But heaven forfend that the market should ever learn from its mistakes.

We need hand cuffs for dishonest and delusional bankers today, or we’ll need pitchforks, torches, tar and feathers for all bankers tomorrow.

I Have Neglected the Ukraine

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They had elections for President, and in the first round, current President Viktor Yushchenko was completely blown out, and the top vote getters, Russian friend Viktor Yanukovych, and current Prime Minister Yulia Timoshenko went to a runoff.

Well, Yanukovych won the election, though Timoshenko is still contesting the election.

As a result, investors are avoiding a Ukrainian debt issue like the plague as a result, because:

  • Investors don’t like an unstable government, and because they prospect of Timoshenko remaining in government unsettles them because:
  • She has a reputation for obstructionism that makes John Boehner look like Doctor Ruth The cabinet that she has nominally been in in charge of has been unable to agree on budget cuts that the bond investors are demanding.

It’s a mess.

Update on the Bayh Announcement

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I don’t like the idea of a yet another Blue Dog becoming the Senator from Indiana, but Tamyra D’Ippolito is a political horror show.

She’s not just a political neophyte, she is also a 20 year veteran of Wall Street, including time at Lehman brothers.

So, what she appears to be is someone who spent 20 years on Wall Street, some of it at one of the more infamous players in finance, and then retired and decided to play dilettante.

It’s a toxic combination of ties to the financial crisis and political inexperience.

I’ll stick with what I said earlier, I’m pulling for Evansville Mayor Jonathan Weinzapfel, though I am going to hate spelling his name.

What Real Banking Regulations Look Like

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In the UK, the Financial Services Authority (FSA) has told banks that if their bonuses do not comply with regulations, the face the forfeiture of their banking licenses:

In an extraordinary ultimatum that has shocked some of the City’s biggest companies, the Financial Services Authority (FSA) told bank bosses that 60pc of all pay must be deferred, with no exceptions, even for those whose contracts conflicting with the edict.

Many of the global players have in recent weeks made representations to the City watchdog, in particular about pre-existing employment contracts that guarantee bonuses over a year or more. But their appeals have been met with the FSA’s toughest yet response.

One pay executive in a major bank told The Daily Telegraph: “The message came back that while the FSA agreed that it does not have jurisdiction over contractual law, it does have jurisdiction over issuing bank licences in London, and that we should go away and unwind the contracts.“

Bankers at Merrill Lynch are among the first affected. Those with pre-existing contracts were told about the FSA’s tough stance on Friday when their bonuses were agreed.

(emphasis mine)

This is very canny on the part of the FSA. They aren’t instructing banks to break contracts, which might create all sorts of problems with EU or WTO “free trade courts”, they are saying, “This is the rule, if you don’t comply, bye bye licens(c)e.”

If an employee refuses to modify their contract, it’s pretty clear that they are deliberately engaging in an activity which would cause the loss of their firm’s banking license, which in a sane universe is grounds for dismissal.

I wish that I lived in a country with meaningful banking regulations.

Scary Mortgage Developments

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The first bit of news is that the mortgage delinquency rate in the United States has passed 10%.

That’s a pretty scary number if you are a mortgage lender.

The second bit of scary news, and it contributes to the first, is that borrowers are increasingly paying off credit cards before their mortgages, with, “percentage of borrowers who are delinquent on their mortgages but paying their credit card bills on time is growing, to 6.6 percent in the third quarter of 2009 from 4.9 percent in the same quarter of 2008.”

Part of this may be the bankruptcy changes of a few years back, which make it much more difficult to discharge credit card debt, but a lot of it is also the fact that the mindset has changed, and people are looking at their houses as bad investments, and so are in a “walk away” mindset.

The banks and mortgage brokers rode the bubble by selling homes as investment vehicles, as opposed to shelter, and now, they are dealing with borrowers who increasingly look to their homes in the same way, and are considering “jingle mail” as a way to deal with something that they see as a failed investment.

Goldman Sach Losing Profits from Trnasparency

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The big banks profit on this lack of transparency

As a result of moves by regulators to move Credit Default Swaps, it looks like the big banks are looking at a revenue stream drying up:

Goldman Sachs Group Inc. and JPMorgan Chase & Co. will find it tough to reproduce last year’s record trading revenue as the difference between bid and offer prices in credit markets narrows to the tightest in almost 18 months.

The CHART OF THE DAY shows how the gap between prices at which traders offer to buy and sell credit-default swaps on North American companies has shrunk to 6.1 basis points, from as high as 20.4 in October 2008 and 16.3 in March. Historically wide spreads on everything from derivatives to bonds, representing fees earned per trade, helped fuel the recovery in bank earnings.

Basically, this gap is the difference in buying and selling prices, and it is the investment banks that profit from large spreads.

It’s why they have been campaigning to keep financial instruments off of public markets. When buy and sell prices are public knowledge, the spreads between them shrink, and so do the banks profit margins.

That’s why they want carve-outs from requirements for public trades: It robs them of the ability to overcharge for their services.

The Robin Hood Tax Gains Support in the UK

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I Would Like to See This on US Television

It’s actually called a “Tobin Tax“, and the idea is that a tax of about 5 basis points (0.05%) on non-consumer bank transactions (otherwise known as “speculation”).

As was noted with the original Tobin proposal, this is actually very hard to evade, because they sales have to be settled something, and for any transaction of any significant size, this means only a few places, New York, London, Paris, Frankfurt, Tokyo, etc. settle (i.e.) pay.

If you moved from highly trafficked settling institutions to obscure ones, the costs of settling become much higher, and in fact will likely likely be much higher than 5 basis points.

There is an organization in the UK, the Robin Hood Tax campaign, which is lobbying for the idea, and produced the above video, which illustrates how it would work, and how it would benefit everyone except for the vampire squids* of the world.

In an interesting twist to all of this, the folks at the campaign put up an online poll, and some online entities spammed the poll to oppose the proposal.

I wonder who might have done this?

The Robin Hood Tax campaign alleged that a Goldman computer was one of two computers that allegedly “spammed” the internet poll with more than 4,600 “no” votes in less than 20 minutes on Thursday.

Technical staff for the Robinhoodtax.org.uk website said the “no” counter increased at a “dramatic rate” from 3.41pm.

The number of “no” votes jumped from 1,400 to 6,000 before campaigners – who are calling for the introduction of 0.05pc tax on banking transactions – tightened the site’s security.

Robin Hood’s security team claimed it traced the erroneous votes to two computers, one of which is allegedly registered as belonging to Goldman.

Goldman is saying that it has, “just received this information and is investigating fully,” which in the UK means busting which ever staff member is of Indian or Pakistani extraction, I guess.

In any case, the “Yes” vote is winning by about 9:1, 41488 to 4626.

I approve of their program, though I think that 5 basis points is too low. It should be at least 25 basis points (¼%).

*Goldman Sachs and their Evil Minions™

Speaking of Not Having Real Regulation in the United States

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It looks like one of the major changes in regulation of financial services firms, that they act in their clients best interest, a so-called fiduciary responsibility, as opposed to the current standard of “industry standard” behavior, which basically says that the only crime is to get caught.

Well, Tim Johnson, no doubt still suffering from the effects of his stroke 3 years ago, has decided to kill the fiduciary requirement, and send the idea to the SEC for a “study”:

Lobbying by insurers and banks including Morgan Stanley may result in the elimination of a proposed new standard that would make retail brokers more accountable to their clients.

Tim Johnson, the South Dakota Democrat in line to become the next chairman of the Senate Banking Committee, is circulating a proposal that would drop the so-called fiduciary standard for brokers from the panel’s reform package, according to a copy obtained by Bloomberg News. Johnson instead proposes that the U.S. Securities and Exchange Commission conduct an 18- month study to see if there’s need for a new broker standard.

Consumer advocates have pushed for the fiduciary standard, arguing that investors are misled by the adviser title used by thousands of brokers. Investors have difficulty distinguishing between investment advisers and brokers, and most see their brokers as advisers, according to a 2008 Rand Corp. study commissioned by the SEC. Without the fiduciary requirement, brokers don’t have the same accountability for their advice as investment advisers and have more leeway to sell financial products created by their own firms instead of seeking the best investment for the customer.

Not only is this bad policy, it’s bad politics.

Make the Republicans vote against a law that says, “Financial advisers must act in their client’s best interests,” if you push it, people will understand it.

We Are All Max Bialystock*

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Have you heard the latest derivative?

Cantor-Fitzgerald, showing evidence that they are still insane with grief after having 2/3 of their employees on 911, have come up with a twist to their new and innovative financial product, the Hollywood Stock Exchange, a game where people can “bet” funny on the success and failure of movies.

The twist, they are asking for regulatory approval to allow people to bet real money.

If any of you have seen The Producers, then you understand the possibilities:

Here’s how it would work. Hollywood studios, actors, directors, investment banks, hedge funds, and anyone else would be able to buy and sell contracts based on the value of all ticket sales in the first four weeks of a movie’s release. According to Cantor Fitzgerald’s plans, the contracts would each be worth one-millionth of a given movie’s gross sales during that four-week period. Let’s say that you thought Avatar would pull in $500 million during its first four weeks. So, you buy 100 futures contracts at $490, figuring that when Avatar made $500 million you’d be up $1,000. Unfortunately, as it turned out, Avatar “only” made some $430 million domestically in the first month after its release—meaning that you’d lose a cool six grand.

One problem, skeptics say, is that Hollywood insiders could have a huge advantage in such a market. People in the movie business often have far greater access to crucial information about a film’s box office prospects than ordinary investors do—such as how big the marketing budget will be or how bad the performances are. “If the industry is selling, odds are that it is a bad idea to buy,” says Dean Baker, the codirector of the Center for Economic and Policy Research.

The deeper meaning to all of this is that these folks at Cantor Fitzgerald really see an opportunity for people to use their inside information as a way to steal from the general as a legitimate financial innovation.

It’s not, it’s a fraud, and it is transparently a fraud conceived for the purpose of generating commissions.

It is an indictment of the very concept of “financial innovation” as put forward by Wall Street.

Whoever came up with this idea should be banned from working as a broker for life.

*Seriously, if you don’t understand the reference, for Pete’s sake, get out more, or go to the Wiki.

Economics Update (a Day Late)

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Well, yesterday was, as Atrios says, jobless Thursday, and unemployment claims fell more than forecast, falling to just 440,000, which is still not enough for an increase in non-farm employment.

The White House is predicting about 95,000 new jobs a month being created in 2010, but based on some quick numbers, a 1.1% annual labor force growth times 155,200,000 people in the US labor force divided by 12 months, there need to be about 142,000 jobs created each month just to accommodate natural growth, so things aren’t getting better, they are just getting worse more slowly.

On the other hand, the news out of California, that tax receipts are well in excess of predictions, is legitimately good news.

Finally, in a discovery of the blatantly obvious, a the TARP’s Congressional Oversight Panel has determined that commercial real estate is imploding, and this threatens the viability of many small and mid sized bank. …………Hoocoodanode?

A Good Start

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The New Mexico legislature has just voted to move a significant portion of the state bank accounts to small community banks and credit unions:

New Mexico’s House of Representatives voted Monday to pass a bill that allows the state to move $2 billion – $5 billion of state funds to credit unions and small banks.

The municipal funds bill was approved 65-0, and is subject to a vote by New Mexico’s Senate. Governor Bill Richardson told the bill’s sponsor that he supports the legislation.

It’s a good start.

If we can defund the to big to fail institutions, they shrink, and lose influence in the corridors of power.

OK, Now, it’s Time To Roll Tom Tomorrow

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Tom Tomorrow, from Sept. 19, 2005 and Feb. 1, 2010

So Barack Obama is now saying that he, “doesn’t begrudge the $19 million in bonuses for Goldman Sach CEO Lloyd Blankfein and JP Morgan Chase CEO Jamie Domon:

“I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.”

This is simbply a complete mind f%$#.

It is as Krugman notes, clueless, and Simon Johnson notes that this is an example of, “One of the most complete (and awful) instances ever of savvy businessmen capturing a state and the minds of the people who run it.”

Even if you accept the argument, such as was made by Greg Seargant, that Obama was actually making a nuanced statement where he attempted to show concern without being too “anti-business” in his statements, an to be fair, both Simon Johnson and Paul Krugman, as well as yours truly accept this, it’s still wrong, and shows a concern that is warping the decision making process at the white house.

Johnson notes that he is, “Not sure why he needs to strike that balance. CEOs are overpaid, bankers are overpaid, and bank CEOs are overpaid. Why not just say it plainly?”

Paul Krugman thinks that the nuance makes it worse:

I really don’t see how this makes things any better than the reporting in the Bloomberg story. We don’t begrudge wealth in the free market system — OK, but this wasn’t about free markets, this is an industry that survives only thanks to taxpayer backing. And Wall Street bonuses are like baseball salaries; please.

Just to be clear: what freaks me out about this isn’t what it says about Obama’s policies, it’s what it says about failure to read the mood of the country. The president seems solely concerned that someone might think that he’s anti-business, without — in this interview, at least — appearing to consider it necessary to say a thing about the pervasive sense of unfair Wall Street privilege. He doesn’t have to bash bankers every step of the way, but to respond to a question about bonuses solely by praising free markets and comparing bankers to baseball stars is … clueless.

Whether Tom Tomorrow is right, or whether Paul Krugman is right, what it means is that there is a distinct possibility of a President Palin in 2012.

Economics Update

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H/t Calculated Risk

We have the numbers for the December trade deficit, and it increased by 10.4%, largely on the increases in energy imports. (See graph pr0n)

In the nexus of banking and real estate, home mortgage demand fell last week, despite the fact that rates fell on the 30 year fixed mortgage, and as the Mortgage Bankers Association notes, the fall is in new home purchases, refinancing continues apace:

The Refinance Index increased 1.4 percent from the previous week and the seasonally adjusted Purchase Index decreased 7.0 percent from one week earlier. The unadjusted Purchase Index decreased 1.1 percent compared with the previous week and was 7.5 percent lower than the same week one year ago.

In international finance, the Bank of Korea kept its benchmark steady 2%, largely in response to surging unemployment in South Korea.

Australia, on the other hand, experienced the largest growth in the workforce in 3 years.

In currency, the dollar was mixed, largely on reports that a deal may be in the offing in the Euro Zone for Greece’s debt mess, news of which also drove oil prices slightly higher.

If On the Jury, I Would Vote to Acquit

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A group of German pensioners are on trial for abducting and imprisoning their investment adviser:

A retired architect and four other pensioners took their financial adviser hostage and held him in a purpose-built prison in Bavaria after their stock market investments failed, a court has heard.

The 74-year-old architect, identified only as Roland K, told a court in Traunstein, southern Germany, that he and his accomplices thought their financial adviser had “cheated and taken the piss” out of them after their investments in the US property market evaporated. As a result, he told the court, they had “decided to invite him for a few days’ holiday in Upper Bavaria”.

Roland K denied kidnapping but admitted the group, including his seventh wife, 79-year-old Sieglinde, Willi D, 60, and Iris F, 64, a retired doctor, abducted James Amburn at his home in Speyer, southern Germany, in June before transporting him in the boot of a car to Roland K’s house at the lakeside resort of Chiemsee, where he had built a prison for him in the cellar.

I don’t approve of such behavior, and I would not do so myself, but if these sorts of vigilante justice are nullified by juries on a regular basis, bankers will start looking to preserving their skins, and not their bonuses and tax dodges.

If they don’t get the message soon, we will see the people with guns shooting bank presidents.

I hope that the bankers get the message before we start seeing widespread murders.

I Know That They Are In the Faith Business………

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But the fact that the Church of England (i.e the Anglicans, called the Episcopal Church in the US) has invested 100% of its pension funds in equities (stocks) seems to me to be just a little bit risky:

The Church faces the same problems as all employers with DB pension schemes – improved longevity and lower real interest rates. But the Church’s pension problems are largely self-inflicted since, astonishingly, the scheme has an asset allocation of 100 per cent equities – the riskiest asset allocation of any UK pension scheme. To add insult to injury, it has (reluctantly) agreed to start moving to 70/30 equities/bonds, but not until 2017, and not to be completed until 2027.

(emphasis mine)

There is a good reason for interest rates to be up against the zero bound right now, but interest rates have been unreasonably low since GW Bush took office, as the result of a conscious decision by Alan Greenspan to bolster Republicans (politically independent Fed, my tuchas), and when this happens, people do insane things to get returns as a result.

Matt Taibbi Nails it Again

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He discusses the fact that John Thain, the man who spent over a million dollars rehabbing his office at Merrill Lynch while conspiring to conceal losses from Bank of America shareholders has now been appointed CEO of troubled business lender CIT.

Matt Taibbi asks the question that this raises, “Man, exactly what do you have to do to become unhirable in this country? Eat Christian babies on CNN?“

It’s true. As Mr. Taibbi notes, the “Genius” behind the LTCM fiasco is still getting to make his money playing with other people’s money.

This is all about corruption and nepotism.

Economics Update

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Normally, I don’t talk stock prices, particularly the Dow, which is an arbitrary and not particularly accurate metric of the stock market, but the fact that the DJIA closed below 10,000 today has a significant effect on the thinking of the markets, or at least on the thinking of the financial journalists.

On the other hand we do have some good signs, most notably that the interest rate premoum on junk bonds appears to be falling, which generally implies that financing is becoming more available.

Additionally, it appears that some sort of deal is in the offing with the EU to bail out Greece, which has driven voth the Yen and the dollar lower, because investors are not looking so hard for safe havens.

As is the norm, the falling dollar has driven oil higher.