He calls them “scum”.
Category: Finance
Economics Update
The obvious lede here is that the leading economic indicators have risen for the 3rd straight month.
3 straight months is supposed to indicate that that a recovery is likely.
I’m not sure just what the recovery is supposed to be, as in the nonsensically titled article, “Commercial property price drop may signal bottom,” which takes the position that a -7.6% price decline in May, which followed a -8.6% decline in April, (-16.2% in 2 months!!), a -29% year over year decline, and -34.8% decline from peak is not the next tsunami in real estate and banking.
The fact that commercial mortgage defaults have hit a20-year high would seem to mitigate against any recovery any time soon in the commercial real estate sector.
In any case, commercial lender CIT, not to be confused with Citi, managed to cut a deal which staved off bankruptcy, and this calmed investors, which increased their optimism and appetite for risk, which
pushed the dollar to a 6 week low, and drove oil prices up, though retail gasoline, which lags oil prices, fell to an 8 week low.
One Very Big Plus to the Waxman-Markey Climate Bill
It appears that the legislation, which creates a Co2 cap and trade regime, also bans naked credit default swaps, and could be construed as banning all credit default swaps:
Here’s the key passage from Waxman-Markey, buried on page 1,070 of the 1,428-page bill introduced in the Senate on July 6:
“It shall be unlawful for any person to enter into a credit default swap unless the person:
1) owns a credit instrument which is insured by the credit default swap;
2) would experience financial loss if an event that is the subject of the credit default swap occurs with respect to the credit instrument; and
3) meets . . . minimum capital adequacy standards…”
Basically, a credit default swap is an insurance policy on a financial instrument, and a naked swap is an insurance on a policy in which one has no interest in its continued existence.
This section of the bill is clearly intended to ban naked swaps, but some people are arguing that the specific language of the bill actually bans all CDS, because the person selling the swap does not have own, “a credit instrument which is insured by the credit default swap,” but by selling the insurance they are “entering into” the CDS.
My guess is that the courts will not view this as a ban on all CDS instruments, and if Waxman-Markey bans nakes swaps, this is enough to justify support the bill on its own, as weak as it is.
By background, in insurance, it’s forbidden to, for example, take out insurance on things like your neighbor’s home, and has been for some time:
In 1746, Parliament passed the Marine Insurance Act, requiring anyone seeking to collect on an insurance contract to have an interest in the continued existence of the insured property. Thus was born the insured-interest doctrine. The indemnity doctrine, which precludes a buyer from insuring property for more than it’s worth, soon followed. The point of these rules is to limit insurance contracts to trading existing risks and not to create new risks by giving buyers of insurance incentive to destroy property. The doctrines have been part of insurance law in both England and the United States (which in 1746 were colonies under English common law) ever since.
Unfortunately, in the Greenspan/Rubin/Summers America, it was decided that this 263 year old lesson could be ignored, and so we have trillions of dollars in casino bets masquerading as insurance, but isn’t insurance, because then the contracts for naked swaps would be unenforceable as insurance policies.
H/t Kevin Drum
It’s Bank Failure Friday!
And here they are, ordered, and numbered for the year so far.
- First Piedmont Bank, Winder, GA
- BankFirst, Sioux Falls, SD
- Vineyard Bank, Rancho Cucamonga, CA
- Temecula Valley Bank, Temecula, CA
Is Commercial Paper Imploding?
It looks like the credit crunch is not over, as major companies, running from, “Consolidated Edison Inc. to Kellogg Co.,”have been forced to sell bonds, at a higher interest rate, because they cannot get their cash on the commercial paper market, meaning that this market for short-term low-interest unsecured debt is still frozen.
Only One Person Can Really Talk to the Obscenity of Goldman Sachs Profits and Bonuses
Just read what he has to say.
DoJ Probing Derivatives Trading
It looks like a serious investigation of credit default swaps and other derivatives has been initiated by the Department of Justice, and the investigation is specifically looking at the clearing of those instruments. (See also here)
What “clearing” means here is the process of actually settling the contracts for the derivatives, and much of it is done by one entity, Markit Group Ltd., which is owned by the Wall Street Banks.
This appears to be an anti-trust investigation, and my guess is that what they are looking at is that the buy and the sell prices, which always have a slight gap, this difference goes to the clearing agency and or brokerage, might have been manipulated through collusion to magnify this amount, and the profits thereof.
Here’s hoping that some bankers are frog-marched off of Wall Street.
Whiskey Tango Foxtrot!?!?!?!?
Bank of America’s net charge-offs, basically the percentage of the loans written off as bad, on its credit cards hit 13.86% in June.
Great googly moogly, that’s nearly 1/7 of their credit card portfolio…….This is not an ordinary economic meltdown.
Economics Update
Well, in the real economy, we have the Federal Reserve releasing yet more down numbers on industrial production and capacity utilization.
The most of the rest of today’s (and yesterday’s, I was not blogging yesterday) news today basically has to do with inflation, with increasing energy prices being responsible for increased retail and wholesale sales, producer prices rising 1.8% in June, and Consumer price rising 0.7% in June, though for the CPI, it was only 0.2% when the more volatile food and energy segments were taken out, and the CPI was down 1.4% year over year, the biggest drop since 1950.
We also have the yield curve slope hitting highs.
The yield curve slope is the difference in interest rates between 2-year and 10 year treasury bills, and is an indicator of market concerns about inflation, so it means that the bond market is seeing inflation out there in the medium term.
I’m not sure where this inflation would come from though, because this year’s back to school sales season is looking as anemic as the 2008 Christmas shopping season.
In any case, good corporate returns for Intel, and obscene returns for Goldman Sachs have left people optimistic, and so the US dollar fell, and, with the help of an anemic inventories report, oil rose above $61/bbl.
Economics Update
Interesting day. Not a whole bunch of news, but what I saw looks like it might mean more than it seems.
First, we have 10-year treasuries spiking, because bond investors believe that the economy will not be recovering this year.
We may also have S&P warning of a lending bubble in China, with the possibility of a “sharp deterioration in banks’ assets,” over the next few months as a result.
I think that if the bond market is right, and that is a big if, then the expansion of lending in China does have a real possibility of a significant hang-over in the next few months.
It does seem that pessimism is ruling energy and currency too, with retail gasoline having its biggest 2 week drop since the end of last year, and crude oil closing at a 2 month low.
Additionally, demand for a safe haven has driven the dollar higher.
It’s Bank Failure Friday!
And here they are, ordered, and numbered for the year so far.
- Bank of Wyoming, Thermopolis, WY
What Barry Ritholtz Said
In his post, Dear Lord, Anyone but Lawrence Summers . . . , about the possibility of Larry being Fed chair:
I read articles like these with dread and horror:
…
So help me God, if Obama nominates this incompetent, lacking-in-judgment jackboot to the FOMC chair, then in 2012, I will write in George W. Bush’s name for President . . .
I’m not that angry, but writing in Ron Paul’s name is beginning to look appealing.
BTW, in his description of Mssr. Summers, he left off “corrupt.”
The inestimable Mark Ames wrote about that almost a year ago.
Fitch Downgrades California to Just Above Junk
It’s down to BBB.
The Mainstream Media Notices that Goldman Sachs is Front-Running*
The entire software caper, and the implication that Goldman Sachs is using software tricks to conduct its computerized trades a few milliseconds before everyone else has hit Bloomberg News.
Nothing to see here, move along.
*Background here.
Timothy “Eddit Haskell” Geithner and Another Big Bank Give-Away
The Congressional Oversight Panel, which oversees the Treasury Department’s peformance on the TARP program, is now saying that the Treasury department is allowing banks to purchase back their warrants, basically a sort of stock option, at only 66¢ on the dollar.
I am so not surprised.
Economics Update
So, the Michigan swurvey of consumer sentiment is down. Perhaps the average person knows something that the “green shoots” folks don’t, or maybe it’s that average people pay more attention to the unemployment rate, which is a lagging indicator.
One interesting thing is that U.S. trade deficit in May fell to its lowest level in a decade, and it was falling imports, along with an increase in exports, that appears to have driven this.
The implication here, assuming that this is not a 1 month blip in the stats, is that the US is lagging the rest of the world in economic recovery, which is not what it has been historically.
It does seem that investors are heading for safety, which drove bond prices up, and bond yields down.
These concerns have led to the biggest weekly drop in oil prices in 6 months, and a strengthening of the Yen and dollar, as a result of demand and safety concern.
Economics Update
Thursday is new jobless claims day, and new jobless claims fell by 52K, to 565K,, bringing the number down below 600K for the first time since late January of this year. (Full disclosure here, one of those 565,000 people was me, if anyone knows of mechanical engineering openings in the greater Baltimore, MD area, it would be greatly appreciated.)
The other shoe dropping is that continuing claims hit an all time high, rising by 159 to 6.88 million.
Also note that these numbers are the seasonally adjusted numbers, and actual claims increased by 17K to 577.5K, and the seasonal adjustment includes a correction for auto factory shutdowns for model changes, which occurred early this year for GM and Chrysler, because of the bankruptcies.
Ain’t statistics grand?
A slightly more realistic metric than the massaged jobs claim data is the fact that retail sales missed expectations in June.
The fact that retailers were selling less than expected led to wholesalers drawing their inventories to the lowest levels since August 2007.
The big news in central bank land is that the Bank of England neither cut its rates nor increased its bond purchases, which had the effect of driving treasuries down, and their yields up.
In any case, it appears that the bogus job numbers (see above) have halted the slide in crude oil prices, with prices settling at $60.41/bbl.
The Bank of England’s move not to cut rates or buy bonds (print money) any faster had the effect of weakening both the dollar and the Yen.
A Good Banking Protest Song
This Youtube is not exactly safe for work:
Barney Frank Endorses Financial Consumer Protection Agency
Not only does he endorse the concept, he plansd to introduce a bill in his committee.
The Senate will be tougher. Hopefully, some discipline can be enforced on filibusters.
Is Goldman Sachs Running a Scam Right out of The Sting?
Yes, we now have a case of what appears to be industrial espionage, or perhaps geeky security breaches, this is once more pulling back a part of the masque from that great vampire squid wrapped around the face of humanity*, Goldman Sachs.
Specifically, a former programmer at Goldman Sachs, one Sergey Aleynikov, is alleged to have stolen the proprietary program trading software that they use and stored it on a server somewhere in Germany. (Also here and here)
What is interesting is what this software actually does:
The platform is one of the things that apparently gives Goldman a leg-up over the competition when it comes to rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and uses top secret mathematical formulas to allow the firm to make highly-profitable automated trades.
Or as is noted in the criminal complaint:
The Financial Institution has devoted substantial resources to developing and maintaining a computer platform that allows the Financial Institution to engage in sophisticated high-speed, and high-volume trades on various stock and commodities markets. Among other things, the platform is capable of quickly obtaining and processing information regarding rapid developments in these markets.
So basically, we have high speed software to execute computer driven trades in response to market fluctuations, to the tune of about 60% of all of these trades, about $100 million a day,
We also have this tidbit from the prosecutor, “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.”
The reality here is that it is being used to manipulate markets in unfair ways, by Goldman Sachs.
Vet74 at Daily Kos explains in a fairly technical way, but basically, this is the scam within a scam from the Paul Newman/Robert Redford movie The Sting, where the man they are cheating, murderous gangster Doyle Lonnegan, believes that they are delaying the ticker tape of race results so as to place bets on horses that have already won.
When they note that the software, “quickly processes rapid developments in the markets,” what they really mean is that this software can pick up on large orders in process, and get their orders in ahead of those orders already in process, and generate profits.
If this were a human transaction, with the agent doing it to a client, it would be called front-running, and it would be a felony.
I’m pretty sure that Goldman does not want everything to come out in court, because, even if it’s legal, the revelations would likely lead to calls for additional regulatory reform.
They just want this gut to cop a plea, extract some sort of non-disclosure agreement, and then make him disappear.
You can tell this, because they are playing some serious hardball here.
They discovered the loss of the code some time in mid June, but held off on notifying authorities until July 1, pretty much guaranteeing that the arrest, and setting of bail would take place over the holiday, and he would have to spend the weekend in jail.
He is out on bail now, but I expect a plea, or a convenient suicide, because the exposure in open court of what amounts to a massive, pervasive, and thoroughly corrupt insider trading scheme is something that the squids* will find unacceptable.
Then again, I am a bit tinfoil hat on such things.
*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.