Category: Finance

Unfortunate Headline

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OK, I get it Ken Lewis is gone in a few months, and the race is on to replace him, but the use of this phrase also implies an unsavory, and illegal practice, front-running.

I would not be surprised if, “Chief Risk Officer Greg Curl and Head of Retail Operations Brian Moynihan,” or for that matter if another widely reported contestant for the position, Sallie Krawcheck, head of BoA’s global wealth and investment management division, had engaged in, or are engaging in, such behavior, but the headline is…How to put it…Odd.

This Won’t Criminalize Anyone

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The recent moves to curb secrecy in private banking does not make any a criminal, it simply makes catching the crooks easier:

European leaders should give up the attack on Swiss banking secrecy and accept a withholding tax on foreigners to avoid criminalizing wealthy taxpayers, said Konrad Hummler, managing partner of Switzerland’s oldest private bank.

“If there is really a desire to criminalize part of the elite in European countries, then it would be a bigger problem for these countries than for Switzerland,” Konrad Hummler said in an interview at the offices of Wegelin & Co. in Zurich. The “majority of European clients were not criminals but just diversifying away from their home country

There is nothing illegal about using a private banker, but people are using private bankers to conceal income from tax authorities and to conceal income, and assets from spouses in divorce cases, and these are explicitly criminal acts, tax evasion and fraud.

Under the current world banking regime, people can put money in almost any institution that they want in almost any country, including Switzerland.

What is a crime, and has always been a crime, is putting money some where to hide it from tax authorities and opposing counsel.

Maybe we should go Chinese, and have a roving execution van, and put bullets in the heads of tax evaders, and their co-conspirator bankers, like Konrad Hummler.

Mr. Hummler, if you didn’t want to go to jail, you shouldn’t have been a criminal

Obama’s Problem in 1 Picture

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The larger problem here is not that somehow or other that these feelings are an inaccurate Thing is, these opinions do accurately reflect reality

Ezra Klein nails it with one picture.

You see, the American public, given a few months, and a subject that holds their interest, even tangentially, and they begin to tease truth from fiction, and as a group, come to understand what is going on.

It’s the Delphi Method writ large.

We saw it during Bill Clinton’s impeachment, when the public came to realize over a period of months that this was not the end of the world, it was some guy lying about cheating on his wife, and the Republicans attempting a coup as a result.

So, here we are, 8 months into the Obama administration, and a year into the financial crisis, and the American public gets it: No one is the least bit interested in doing anything to help them.

They are bailing out banks and automakers, and CEOs are still getting obscene pay packages, and the, as taxpayers are paying for it.

You see, this is not a problem that can be solved with an Obama speech, because there is nothing to explain here. That great vampire squid wrapped around the face of humanity,* Goldman Sachs, has captured treasury, insurance has captured healthcare, and real-estate has captured….well…Everything.

The Obama administration, and much of the Democratic Party has been captured by the Finance, Insurance, and Real-Estate (FIRE) sectors, and so is attempting to support the phony products of this sector, as opposed to produce something useful.

The Republican party has been captured by FIRE too, but this doesn’t matter, because they are remarkably honest about this, and their platform is not to protect the little guy, but rather to hate those defined as “the other”, so they are neither hypocrites, nor are they likely to lose much support.

That being said, much as in 1994, when people looked at the Democrats in Congress, and said, “If they are both going to f$#@ me over with NAFTA, I might as well vote for someone who hates f*gg*ts and n*gg*rs too,” Obama and the Dems are in real trouble.

As Harry S Truman said, “Given the choice between a Republican and someone who acts like a Republican, people will vote for the real Republican all the time.

Absent actions that involve most of the senior staffs of Goldman Sachs, J.P. Morgan, Citi, Bank of America (Especially Ken Lewis), and the ratings agencies (S&P, Moody’s, etc) frog marched out of their places of work in handcuffs, this is the reality we have, not the reality we’d like to have.

*Alas, I cannot claim credit for this bon mot, it was coined by the great Matt Taibbi, in his article on the massive criminal conspiracy investment firm, The Great American Bubble Machine.

How to Tell When Finance is Doing a Very Bad Thing

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When the Wall Street Journal Describes Finance With Cartoons, it Means that Someone will Get Boned, and it ain’t the “Bankers, Lawyers, and Other Advisers.”

When the Wall Street Journal talks about a new financial wonder weapon, like the resecuritization of real-estate mortgage investment conduits (re-remics), and they feel the need to use a cartoon to explain how it works.

Does that cartoon look complex to you? There are a couple of reasons for this:

  1. The bankers, lawyers, and other advisers are picking your pocket.
  2. In a perverse way, needless complexity is good for business, because it makes people feel like they are paying for meaningful services.
  3. It justifies the enormous fees collected by Wall Street, not just for brokerages, but also for the now discredited ratings agencies..

But the bottom line is this:

The net result is financial firms’ books look better and they need to hold less capital against those assets, even though they are the same assets they held before the transaction.

(emphasis mine)

This business will get out of control. It will get out of control and we’ll be lucky to live through it.

It’s time to cue Freddie Dalton Thompson from The Hunt for Red October.

So, you have the same amount of risk, but by slicing and dicing securities into new “pools” (a year ago the word was “tranches”, but well, we know how that went.

This is not about managing risk, or understanding risk. This is about concealing risk from the unsophisticated investor and unsophisticated regulators.

This is a perfect example of why investments should be treated like drugs: Forbidden until proven safe and effective.

Financial innovation, my ass.

I am Now Prepared to Offer Investment Advice

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Just watch Jim Cramer’s Mad Money, and whatever he says, do the opposite:

Yesterday, market pundit Jim Cramer made a ridiculously awful call on embattled lender CIT (NYSE: CIT). Cramer made a call to buy CIT stock yesterday. Well today it is down 40% on reports a deal with bondholders will wipe out the current common shareholders.

Here is what Cramer said on CIT yesterday.

“Because no one forced CIT into bankruptcy, it can live to play again, and when I read in the New York Post that Paulson owns CIT debt, I realized that he’s powerful enough to save this company, particularly because he is one of the investors in IndyMac and knows his way around the bottom of the debt barrel.

These two stocks represent lottery tickets that are no longer rip-ups because they have made it out of the “critical care” stage and are recovering.

I would buy them both.”

Google Jim Cramer and Bear Stearns, or just look at these old videos from The Daily Show (also here).

Economics Update

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Well, notwithstanding the “green shoots” that every fool (Ben Bernanke) is crowing about Consumer Confidence fell to 53.1 in September, down from 54.5 (revised) in August, and well below the predicted 57.0.

While this may not effect spending for the Christmas holiday, it does look like it’s putting a crimp in Halloween spending, with consumers planning to spend about 20% less this year.

Of course, we are still seeing some good news, such as the Case-Shiller home price index rising for the 3rd straight month, but, as Barry Ritholtz notes, it’s still down 13.3% for the year.

I would also add, that these are seasonally adjusted numbers, which really make no sense when a market is as out of whack as this one is, it’s YoY that gives meaningful data.

We also have the Chicago Fed’s National Activity index falling in September, to -.90, from August’s -0.54, indicating further contraction.

Overseas, we are seeing more good news though, with consumer confidence in Germany increasing to a 16 month high, and the Brazilian central bank being confident enough that it is starting to clamp back down on credit, which means that they are worried about inflation.

One hopes that the Brazilian bankers are not jumping the gun here.

In insurance, we have a bit of nostalgia, with the monoliner insurers popping up their head again, as S&P cut both MBIA, Inc. and MBIA Insurance credit ratings, to BB-minus and BB-Plus respectively.

Both ratings are below investment grade. (i.e. junk)

In energy, it looks like the consumer confidence numbers have driven oil prices down, to $66.71/bbl, and it looks like natural gas prices are about to fall off a cliff, because the salt domes, depleted oil fields, and aquifers used to story the fuel have reached capacity, meaning that anything pumped has to be sold, and delivered as soon as it leaves the ground.

Gasoline prices are continuing their fall too.

Meanwhile, the dollar is up, largely on increased worries about the economy, though the rate cut by Russia’s central bank has also made the USD more attractive to investors.

FDIC Goes Wimpy

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I’d gladly pay you Tuesday for a hamburger today

I don’t mean that Blair and company have become shrinking violets, I am instead referring to the comic book character from Popeye.

The FDIC is asking banks to prepay their insurance fees through 2012, in order to handle the depletion of their insurance funds.

It is the Wimpy theory of funding, and its success is contingent on the idea that the recession is over, and so we will see a fairly robust recovery.

If they are wrong, and given the impending implosion in CRE which threatens small and regional banks, I think that they are, it won’t do much.

In fact, I can see creditors going after the prepaid insurance premiums, which will create a big mess.

Adventures in Ass Covering

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It looks like any number of financial institutions are realizing that Congress is going to do them like a College Republican does a drunk sorority girl if they don’t get their act together, so they are now taking actions that they should have taken years ago. (See Barn door, cows missing)

First, the Federal Reserve has finally concluded that it should regulate some more of the non-bank lenders out there:

Tuesday that it will extend its regulatory umbrella to cover a group of lenders that includes several major originators of subprime loans, policing whether they follow federal laws that protect consumers of mortgages, credit cards and other financial products.

Federal banking regulators already oversee companies that own banks, known as holding companies, along with the banks themselves. Under the new policy, the Fed will extend the same oversight to other businesses owned by those holding companies, such as units that make home-equity loans.

The policy places subprime lenders such as CitiFinancial, an arm of Citigroup, and Wells Fargo Financial, an arm of Wells Fargo, under Fed oversight for the first time. The same laws protect all borrowers, but until now, no federal agency watched to make sure non-bank subsidiaries followed the law.

And we also have the FED suddenly requiring the financial institutions submit their pay policies to them for review.

What is going on here is that there is significant push-back in Congress against the Obama proposal that the Federal Reserve be the primary systemic risk regulator, and the desire of the Fed to be the “financial consumer protection agency”, as Bernanke is aggressive lobbying for this role shows.

When this is juxtaposed with increasing support in Congress for the Paul/Grayson proposal to audit the central bank, and we are having a gallows conversion, where they attempt to show that they are really concerned about regulation and protecting ordinary people.

Hopefully, this won’t work, and we will see a Federal Reserve with a smaller, and not a larger, role than it has today.

I think that the only two people who want the Fed’s role to expand are current chairman Ben Bernanke, and White House Economic Advisor Lawrence Summers, who is hoping to be Fed chair one day.

We are also seeing the same things with banks and overdraft fees, where proposals in Congress to regulate fees, as well as “automatic overdraft protection” and check clearing orders, are creating an orgy of heretofore non-existent concern for consumer among the big banks, with Bank of America, Wells Fargo, and J.P. Morgan Chase announcing that they will be rolling back their fees.

There is no big surprise here, the banks know that if they can always raise fees again.

The argument is the same: “We’ll be good, there is no need for legislative restrictions.”

What goes unspoken is the idea that once people are looking the other way, the rates will go back up again.

It’s the same thing with the Conference Board, an organization created for, and funded by, business executives, who are now saying that they will be issuing a report suggesting fixes in how executive compensation is determined:

The report to be released today urges companies to avoid paying for personal travel, hefty severance packages or above-market returns on deferred compensation. The recommendations were endorsed by the California State Teachers’ Retirement System, AT&T Inc. and others.

“In order to restore trust in the ability of boards of directors to oversee executive compensation, immediate and credible action must be taken,” the report from the New York research group said.

This is not about fixing things, this is simply an effort to create the appearance that things might fix themselves, in order to forestall any potential laws or regulations that would prevent excessive compensation from returning in the future.

I suppose that there is a silver lining to all this, which is that the people involved are clearly worried, which perhaps real changes can be initiated.

SEC to Take on Ratings Agencies, Flash Trading

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It looks like the SEC will start cracking down on the ratings agencies, like Standard & Poors and Moody’s.

Basically, they are going to be issuing a ruling saying that they will be treated as “experts” which creates greater liability for their opinions:

Currently, the rating agencies are not considered experts. They have argued that they are exempt from these rules because they are only providing an opinion and are protected by free speech laws.

Meanwhile, others such as auditors that companies use and cite in their public filings are considered experts and can be sued by investors. Other experts include engineers that oil and gas companies rely on to determine the amount of resources in the ground.

They are also going after the super high speed trading done by some brokerages who have placed their servers in the same room as the exchanges, allowing them to basically front run the entire market, at the expense of honest market participants.

Of course, the idea that the ratings agencies aren’t experts, and until now, never were experts, just buggers the mind.

As it stands now, the exchanges grant access to buy and sell orders a few fractions of a second before they execute to the flash traders, which allows them to pick up a penny or two by buying before a big buy, or selling before a big bell.

It requires the cooperation of the exchanges, and the SEC is moving to forbid any such cooperation:

SEC commissioners unanimously voted today to seek public comment on a rule barring exchanges and trading platforms from giving clients access to information about stock orders a fraction of a second before the market. The proposal requires a second vote at a later public meeting to become binding.

“Investors that have access only to information displayed as public quotes may be harmed if market participants are able to flash orders and avoid the need to make the orders publicly available,” [SEC] Chairman Mary Schapiro said.

This never would have happened under the last guy in the White House.

The Term is Pump and Dump

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Happy, happy, joy, joy, the ratio of insiders selling stock to insiders buying stock has
fallen to only 40.6:1 seller:buyer.

At the end of August, it was 61.8:1, but even with the improvement, a lot of folks are getting the f#$@ out of Dodge.

This is what happens when the Federal reserve’s prescription for a financial crisis is to print money for banks to buy stock, which drives the price up, and the insiders are selling stock just as fast as they can.

At the rate that this is going, the smart investment won’t be gold, it will be ammunition and canned goods.

Economics Update

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Click image for full size

Unemployment Graph Pr0n Courtesy of Calculated Risk

Exhaustion Rate Graph Pr0n Courtesy of zero hedge

Initial claims for unemployment fell this week again, down 21K to 530K, but that’s because unemployment claims from last week were revised to 551. The first count was 545K, so the apples to apples delta is 15K, not 21K (I love how it always seems to work out this way).

The 4 week moving average fell too, 553.5K, down from 546.5K, and continuing claims fell 123K, to 6.138m from last weeks 6,261m.

Note, however, that continuing claims do not count folks who are on extended benefits, or who have exhausted benefits, and that the exhaustion rate has hit a new record, with 52.40% of all people filing for unemployment exhausting their benefits before they find another job.

In real estate, existing home sales fell for the first time in 5 months, and we are hearing dire warnings about a shadow inventory of 7 million foreclosures which have yet to hit the market, either because the lenders are hip deep in foreclosures, and the process is proceeding slowly, or because they are holding off to avoid selling into a down market.

The down housing market has been good for treasuries, with prices rising, and yields falling, as people flock to their relative safety.

The quest for safety has investors running back to dollars, driving the greenback up, and pushing oil down below $66/bbl (!).

Someone is not believing in recovery here.

Looks Like the Tobin tax is Gaining Currency*

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The Tobin tax, basically a small tax (typically less than ¼%) on financial transactions to discourage rampant speculation and high frequency trading, is moving into the Overton window, and leaving the realm of “you’re nuts,” and entering the realm of “serious people can discuss this.”

2 Weeks ago, Peer Steinbrück, Germany’s finance minister, called for just such a tax, and today an OP/Ed he wrote calling for an 0.05% tax to, noting that German Foreign Minister Frank-Walter Steinmeier also supports this policy.

Personally, I’d much rather see the tax rate closer to ¼% than his proposal of 1/20%, but it’s a good start.

According to his numbers, revenues would amount to, “$690bn a year, or about 1.4 per cent of world GDP,” which, while nowhere near covering the bailout by taxpayers to the banks, AIG alone has sucked about 1/3 of that out of taxpayers, and total spending on the just the TARP is over $700 billion, does have the effect of making bankers feel the pain, and it also makes risky high frequency trading operations economically nonviable.

BTW, it’s not just the Krauts who are beginning to look at this seriously. Adair Turner, chair of the Financial Services Authority in the UK, is calling for the same thing:

So Mr. Turner is proposing a few changes, none of which would make the bankers very happy. Tax financial transactions. Increase capital requirements. Shrink the financial industry, which, at its peak, accounted for roughly 11 percent of the British economy. Only then, he argues, can banks’ excessive profits — and bankers’ pay — be curtailed.

I would also note that Turner has also explicitly stated that the size of the financial industry needs to be reduced because, “The City [the London equivalent of Wall Street] takes too much from British society and gives back too little. It has grown too big and too powerful.”

It’s interesting that this discussion has moved from “crazy people” like Dean Baker, who, we should note, was 100% correct on spotting the real estate bubble, and put his money where his mouth was, selling his condo and going to renting in 2004, though he has recently purchased a detached house to movers and shakers.

And not a moment too soon.

*Pun not intended.

Another Claude Raines Moment: Banker Salaries

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I’m shocked, shocked to find that gambling is going on here!

US Bank CEO Pay Dwarfs Rest of the World: Study

I am stunned that suggestion that the geniuses at Wall Street might somehow be overpaid:

Jiang, chairman of Industrial and Commercial Bank of China, made just $234,700 in 2008. That’s less than 2 percent of the $19.6 million awarded to Jamie Dimon, chief executive of the world’s fourth-largest bank, JPMorgan Chase

…

“The U.S. executive pay levels have always dwarfed pay for companies elsewhere in the world,” said Sarah Anderson, a fellow with the Institute for Policy Studies, which is critical of Wall Street, and co-author of the recent study “America’s Bailout Barons.”

“They have claimed it is impossible to recruit people without paying such compensation. Yet, if you look at the pay levels in Europe and in a lot of Asian countries, somehow they manage to find people who can run major global firms while making a fraction of what they make in the U.S.,” she said.

Great googly moogly: Why don’t we just outsource bank presidents to China.

Barney Frank Can Go Cheney Himself

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Generally, I like the guy, but this is crap.

In addition to excising the requirement that banks offer “plain vanilla” mortgages and credit cards, you know, products which the consumer can actually understand enough to comparison shop for, the bill removes, “securities, commodities, investment and general insurance products; accountants and tax preparers; real estate brokers and agents; lawyers; auto dealers; communications providers; and providers of retirement and pension plans,” from the scope of the proposed consumer protection agency.

Great googly moogly! When you look at industries that confuse and abuse consumers as their primary means of profit, you have most of them in between the quotation marks.

And if you want a couple more, how about,”retailers who have credit or layaway plans and auto dealers who offer loans to buy vehicles,” because used car dealers and “Rent-A-Center” have done so well in doing right by the consumer.

Unsurprisingly, the poster child for regulatory capture, Timothy “Eddie Haskell” Geithner, expressed support for weakening the bill.

Yes, I know sausage making, but it’s damn depressing.

Economics Update (a Day Late) (Again!)

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I know that there is a lot of talk about the recession ending, but all the metrics that involve manufacturing real items in the united states, are down, case in point, the AAR’s report on rail traffic, which is down, 17.1% YoY, which is, as Yves Smith notes, down to 1993 levels.

I’m not saying that the rest of the world is not showing signs of recovery, after all the economic powerhouse New Zealand’s economy has left recession, and the $NZ is hitting records, but for the United States, things are not looking better for the rest of us.

Actually, we are seeing some positive movement in US manufacturing, like GM adding shifts at its plants, though this appears to be one part “cash for clunkers”, and one part having to make up for other plants that have been closed.

We are seeing some action though in Federal Reserve and U.S. Treasury land, where US Treasuries are up, and hence yields are down, largely on the expectation that the Fed won’t do anything to interest rates.

More importantly, we are seeing evidence that the Fed is looking at winding down its money printing. They are not doing it yet, but the Bernanke and crew are in preliminary discussions with bond dealers to implement reverse repurchase agreements in order to get a trillion dollars or so out of the money that they pumped into the economy:

Central bank officials are discussing plans to use so- called reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, said the people, who declined to be identified because the talks are private. That’s where the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system.

Well, the intent is clear, though the mechanism is as clear as mud to me.

In the always fun areas of energy and currency, oil rose because the dollar fell to a one year low, $1.4778:€1.000, though this is still about a dime below the peak in early July of last year.