Category: Finance

After 6 Years of Prosecutorial Excess on Behalf of the Vampire Squid, We Finally See Aleynikov’s Total Exoneration

No Comments

After multiple prosecutions, by multiple prosecutors, at the behest of Goldman Sachs, Sergey Aleynikov is a free man, for a while, at least:

Kevin H. Marino pumped his fist in the air in celebration. Then Mr. Marino, a New Jersey lawyer with a linebacker’s build, turned to his longtime client, Sergey Aleynikov, and gave Mr. Aleynikov, a former Goldman Sachs programmer, a bear hug and a hearty pat on the back.

Just moments earlier, a clerk in State Supreme Court in Manhattan had given Mr. Marino a copy of the judicial ruling that overturned Mr. Aleynikov’s conviction on a charge that he stole confidential computer code for Goldman Sachs’s high-speed trading business.

The clerk, saving Mr. Marino from having to thumb through the 72 pages to learn what Justice Daniel P. Conviser had ruled, simply whispered congratulations to the lawyer. For Mr. Aleynikov, 45, and Mr. Marino, it appeared to be the end of a six-year legal odyssey through the federal and state court systems in New York.

But the celebration may not last long. State prosecutors in Manhattan have already indicated they may appeal the decision issued Monday, which threw out a jury’s verdict.

Once before, Mr. Aleynikov had believed he was in the clear, when a federal appeals court overturned his conviction under a federal corporate espionage law in 2012. The appellate court ruled that federal prosecutors in Manhattan had misapplied the law, and it ordered Mr. Aleynikov to be immediately released from a federal prison.

Less than a year later, however, Mr. Aleynikov was back in court defending himself, after state prosecutors in Manhattan charged him with violating state computer-theft-related laws.

Now Justice Conviser — much like the federal appellate court before him — ruled that the decades-old state law that Mr. Aleynikov was convicted of violating did not apply to the accusations against him.

………

But Mr. Marino was at no loss for words in criticizing Goldman.

“Goldman Sachs is powerful enough to provoke two failed criminal prosecutions to settle a private score,” Mr. Marino said. “Goldman Sachs has also spent millions in shareholder dollars to evade their obligation to pay Mr. Aleynikov’s legal fees for winning two criminal cases.”

I rather expect Vance to appeal, since the Manhattan district attorney is clearly bought and paid for by Wall Street.

At the time, I was hoping that this would turn over the rock that is the illegal front running high frequency trading conducting by the biggest brokerage firms, but the prosecutors were determined to keep that covered up, and to continue to avoid prosecutions that might bot reveal Goldman’s skullduggery, and follow up with prosecutions grounded in bizarre legal theories.

Background here.

If True, Then the Germans Are up to Their Old Tricks, but One Must Consider the Source

No Comments

Somehow or Other, this got deleted from my blog, and so I am reposting:

Andrew Ross Sorkin (of all people) teases an interesting tidbit out of Timothy Geithners self-serving and factually challenged memoir, Stress Test: Reflections on Financial Crises, specifically that in discussions with German FM Wolfgang Schäuble, Angela Merkel’s go to guy on finance had as his goal maximizing pain for the Greeks with the hope that they would be compelled to leave the Euro:

In July 2012, Timothy F. Geithner, the United States Treasury secretary at the time, traveled to Sylt, an island off Germany in the North Sea.

 Mr. Geithner was there for a meeting with Wolfgang Schäuble, Germany’s finance minister, who would spend his summers at his vacation home on the tiny island.

 The topic was Greece.

 In the home’s library, the two men spoke about Greece’s prospects and begun discussing ways for the European Union to keep the country in the eurozone.

 To Mr. Geithner’s dismay, however, Mr. Schäuble took the conversation in a different direction.

 “He told me there were many in Europe who still thought kicking the Greeks out of the eurozone was a plausible — even desirable — strategy,” Mr. Geithner later recounted in his memoir, “Stress Test: Reflections on Financial Crises.” “The idea was that with Greece out, Germany would be more likely to provide the financial support the eurozone needed because the German people would no longer perceive aid to Europe as a bailout for the Greeks,” he says in the memoir.

 “At the same time, a Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union,” Mr. Geithner wrote. “The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall.”

 Fast-forward three years. What Mr. Schäuble articulated that summer afternoon to Mr. Geithner is finally taking shape.

 ………

 A crucial decision made over the weekend had largely gone unremarked upon but is telling. The European Central Bank decided to halt an expansion of its emergency lending facility to Greek banks. That facility could have allowed the banks to continue operating without as much panic and helped avoid some of the capital controls by providing additional liquidity.

 ………

 By closing the cash spigot, the E.C.B. managed to instill additional fear and panic into the day-to-day lives of the Greek people, ahead of the vote on the referendum.

 That panic could cut two ways. The Greeks could look at the lines around the banks as a warning of what’s about to come, which would undoubtedly be worse in the short term, and vote in favor of the latest bailout agreement.

 Of course, they could also view the lines as further evidence of their subjugation to the eurozone and the continued austerity they would experience under the bailout, pushing them to vote against it.

 The E.C.B.’s decision also has another important purpose outside of Greece: It might be a warning to countries like Spain and Italy, should they ever consider following Greece out of the eurozone — if that comes to pass.

 It may seem counterintuitive, but rather than make a Greece exit easy and seamless to avoid dislocations in financial markets, the E.C.B. has the perverse incentive to make it messy and difficult to deter others.

 None of this is to suggest that the E.C.B. is the source of Greece’s problems. They were largely self-inflicted. Regardless of whether you think that the creation of the euro was a terrible mistake, Europe has severely mishandled the situation in Greece.

 “The economics behind the program that the ‘troika’ (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25 percent decline in the country’s G.D.P.,” Joseph Stiglitz, an economist and professor at Columbia University, wrote on Monday. “I can think of no depression, ever, that has been so deliberate.”

 In his book, Mr. Geithner reflected on his conversations with European leaders about the measures they sought to take. “The desire to impose losses on reckless borrowers and lenders is completely understandable, but it is terribly counterproductive in a financial crisis,” Mr. Geithner said.

 At one point, he told Mr. Schäuble: “You know you sound a bit like Herbert Hoover in the 1930s. You need to be thinking about growth.”

(emphasis mine)
If this report is true, and note that I do not consider Geithner’s memoir to be much more than an exercise in self-hagiography, then much of the pain of the that Greece has experienced over the past 6 years has largely been an exercise in sadism for its own sake by the Germans.

If there is a flaw at the heart of the European Union, it is Germany hegemony, which allows them to enforce their chauvinism on the other members.

In the Realm of the Blatantly Obvious………

No Comments

A study of bankers had determined that when bankers are given unrealistically tough performance standards, they cheat:

Bankers are more likely to behave unethically when under pressure to reach tough performance targets, according to a survey of British financial-services employees.

Managers in banking, insurance and wealth management were more anxious and inclined to misbehave when “negative consequences or punishment for poor performance were highlighted,” PricewaterhouseCoopers and the London Business School said in a report on Monday.

“When it made them feel anxious, they tended to say money was one of their key motivators,” Duncan Wardley, a behavioral science specialist at PwC, said in the statement. “They also tended to take more risks and make unethical choices.”

I am so no surprised.

Of course, this could lead to techniques that might enhance banker honesty, but I see that as unlikely.

This is a Feature, Not a Bug

No Comments

You are no doubt aware of how proposals for tax advantaged retirement programs, the IRA, 401(k), the 403(b), etc., have been sold.

We have been told that by allowing retirement funds to engage a the markets, higher returns can be achieved, and thus provide for a more secure retirement.

In the process, trillions of dollars have flowed into stock and other financial markets, resulting in, as the laws of supply and demand indicate, significant appreciation in asset values.

Of course, at some point, people have to retire, and at that point, they have to cash in their assets.

What happens when those trillions of dollars leave the markets.

This is going to get ugly:

This morning the Wall Street Journal ran a story which showed that 2013 was the first year in decades that there was a net outflow from 401(k) plans. The immediate reaction by many was that this is just the start of a mass exodus from the markets by retiring baby boomers, which could have huge implications on the markets in the coming years as we patiently wait for Millennials to pick up the slack with their savings in the 2020s.

………

One of the things I’ve learned over the years is that demographics play a huge role in shaping the economic landscape from everything to the unemployment and labor force participation rates to the buying habits in the real estate market to economic growth (see Calculated Risk on why 2% growth is the new 4% growth for more on this). People are quick to blame or shower praise on politicians when it comes to the booms and busts we see in the economy. More often than not, the economic success or failure of those politicians has more to do with lucky timing in regards to where we happen to be in the economic (or demographic) cycle.

So while demographics does play a large role in shaping economic growth, it’s difficult to say how the mass exodus from the workforce by baby boomers is going to affect the financial markets. It probably comes down to investor behavior more than anything. It’s fairly easy for models to predict how the demographics will play out in the U.S. and abroad in the coming years. It’s not so easy to model out how investors will react to those changing demographic profiles.

This guy is a lot more sanguine about this than I am.

Of course, Wall Street gets paid when you invest, and when your money sits there, and when you pull your money out, so the parasitic financial class will be just fine, it’s just the rest of us who will end up asking, “Do you want fries with that?” for the rest of our lives.

Senator Warren Calls Out Wall Street Tool Heading SEC

No Comments

Senator Elizabeth Warren took aim at the country’s top Wall Street regulator Tuesday in an unusually personal and blunt letter that complained about delayed reforms and lax enforcement, prompting a full-throated defense from the White House.

 In a 13-page letter to Securities and Exchange Commission chairwoman Mary Jo White, Warren cited a “significant gap” between the promises White made during her Senate confirmation hearings and her subsequent performance leading the independent commission.

 “I am disappointed that you have not been the strong leader that many hoped for — and that you promised to be,” the Massachusetts Democrat wrote. “I hope you will step up to the job for which you have been confirmed.”

 Warren launched her salvo as the fifth anniversary approaches this summer of passage of the landmark Dodd-Frank Wall Street reform law. Backers hoped the 2010 legislation would spell a new era of tougher regulation on financial institutions, but it still has not been fully implemented by the SEC — the reason for some of Warren’s ire.

 White House spokesman Josh Earnest brushed aside Warren’s concerns Tuesday afternoon, expressing confidence in White, who the administration nominated to the position two years ago.

 ………

 Suspicion among liberals about White accelerated last week when she appointed a top Goldman Sachs lawyer to be her chief of staff. The left has long complained that key financial regulatory bodies are stacked with staff that have deep ties to Wall Street firms.

 “Warren has expressed the frustration of many people who had high hopes for chairwoman White,” said Dennis M. Kelleher, the president of Better Markets, a nonprofit that supports market reforms. “It’s bad enough that the rule-making is so far behind. It’s inexcusable that the enforcement has been toothless.”

 Kelleher’s group took heat from the left two years ago for supporting White during her Senate confirmation hearings. He and others believed that her background as a federal prosecutor in New York would outweigh her later position as a partner and cochair of the litigation department at a Manhattan law firm with finance industry clients. At the time, he called her a “tough, smart, no nonsense” prosecutor. Since then, he said, he’s witnessed two “largely unproductive years” at the SEC and he is particularly disappointed that key parts of the Dodd-Frank law have not been implemented.

BTW, it’s not just Elizabeth Warren, it is her fellow SEC members who are complaining rather loudly:

Elizabeth Warren just put SEC Chairman Mary Jo White firmly in her crosshairs. White is a deserving target. After being approved based on the promise that she’d reinvigorate a diminished agency via her chops as a former highly respected Federal prosecutor, White instead had specialized in empty promises, foot dragging and financial services cronyism. While these are sadly too common in senior regulatory circles most incumbents do far better than White in presenting a plausible veneer of serving the public interest. By contrast, White’s performance has been so remiss that a fellow Democratic party commissioner, Kara Stein, has gone into open opposition against her, and is regularly joined by the other Democrat commissioner, Luis Aguilar.

Warren’s letter (hat tip Adrien) comes a mere week after another missive calling out White’s dereliction at duty, when three former SEC commissioners blasted White for failing to to move forward on long-overdue rulemaking to require public companies to disclose their political spending.

I am not at al surprised that White has been avoiding any meaningful restrictions on Wall Street.  She is doing exactly what Barack Obama wants.

That’s why he selected Tim “Eddie Haskell” Geithner as Treasury Secretary when he became President, and why he chose Eric “Place” Holder as Attorney General.

Obama wants no consequences for Wall Street lawbreaking, so Mary Jo White is not going anywhere.

Her letter is after the break:

Bloated Billionaire Bellyaching Bitch Bleats Bogus Beef*

No Comments

It appears that yet another hedge fund billionaire is upset that politicians don’t fawn over him like the people he employs:

“I don’t need anybody crapping all over what I do for a living,” Cooperman told CNNMoney’s Cristina Alesci Monday.

Cooperman is the founder of hedge fund Omega Advisors, which has about $9 billion in assets.

He thinks Clinton is a hypocrite for painting a nasty picture of hedge fund managers and then asking them for money and trying to befriend them.

“[She] hangs out with all these people in Martha’s Vineyard and in the Hamptons and then the very first thing she has to say is to criticize hedge funds,” Cooperman, said.

Cooperman, 72, said he isn’t looking for praise, but declares he’s the living embodiment of the American Dream.

“I have nothing to apologize for. I’ve made a lot of money. I’m giving it all back to society,” he says, emphasizing his large donations to places such as Hunter College in New York, Columbia University and Saint Barnabas Medical Center in New Jersey.

You are not the embodiment of the American dream, motherf%$#er, you are a parasite who got particularly lucky.

You poor delicate little flower.

How about you take your billions of dollars and a nice warm warm cup of shut the f%$# up.

*Yes, the fact that I could use this amusingly alliterative title was one of the reasons that I Posted this.†
†Yes, I did spend more time on the hed than I did on the article. I’m kind of lame that way.

Not The Onion

No Comments

Andrew “Buddy” Donohue has been appointed Chief of Staff for the Security and Exchange Commission (SEC).

Before his appointment, Mr. Donohue was a lawyer for Goldman Sachs:

The Securities and Exchange Commission confirmed Thursday that it hired a managing director of Wall Street titan Goldman Sachs Inc. to serve as chief of staff, prompting critics to decry a revolving door that links the corridors of finance and power.

Chairman Mary Jo White has hired Andrew “Buddy” Donohue, the SEC said in a news release, tapping the influential Wall Streeter to become chief of staff of the agency in charge of protecting investors. He’ll serve as a senior adviser to White on policy, management, and regulatory issues.

Most recently, Donohue worked as a managing director and associate general counsel at Goldman Sachs. Previously, he led the SEC’s Investment Management Division between May 2006 and November 2010, spanning two administrations and the worst financial crisis since the Great Depression.

“I am thrilled that Buddy will be returning to the SEC to provide his extensive knowledge and expertise to the agency,” said SEC chief White said in a statement. “Buddy is a seasoned professional whose previous SEC and private sector experience will be invaluable in advancing all aspects of the agency’s mission.”

White said Donohue’s background will be “especially useful” as the commission advances new rules for risk management and weighs a uniform fiduciary standard for the investment community.

Yeah, sure.

It is, “Especially Useful,”  for the, “Managing director and associate general counsel at Goldman Sachs,” to work on rules for risk management and a fiduciary standard for brokers.

FWIW, holding brokers to a fiduciary standard, which requires them to act in the best interest of their client, is something that the financial industry has been fighting tooth and nail, and the man from Goldman Sachs is Chief of Staff for the organization which is drawing up the regulations for this.

Reform, my flabby white ass.

Quote of the Day

No Comments

The markets want money for cocaine and prostitutes. I am deadly serious.

Most people don’t realize that “the markets” are in reality 22-27 year old business school graduates, furiously concocting chaotic trading strategies on excel sheets and reporting to bosses perhaps 5 years senior to them. In addition, they generally possess the mentality and probably intelligence of junior cycle secondary school students. Without knowladge of these basic facts, nothing about the markets makes any sense—and with knowladge, everything does.

—ObsessiveMathsFreak in the comments section of a post on the blog The Irish Economy

H/t Paul Krugman

Seriously, Is Anyone Surprised by This?

No Comments

In nature, parasites are associated with decreased success of the host, so it should come as no surprise that an IMF study shows that economic parasite, such as a bloated finance industry, also hinders economic success:

As the world has floundered in low growth post-crisis, with advanced economies still suffering with credit overhangs and hypertrophied, largely unreformed financial services sectors, it has become acceptable, even among Serious Economists, to question the logic that a bigger financial sector is necessarily better. Of course, the logic of “more finance, please” was never stated in those terms; it was presented in the voodoo of “financial deepening,” meaning, in layperson’s terms, that more access to more types of financial products and services would be a boon. For instance, one argument often made in favor of more robust financial services is that they allow for consumers to engage in “lifetime smoothing” of spending. That basically means if times are bad or an individual has a big investment they to make, he can borrow against future earnings. But we have seen how well that works in practice. Most people have an optimistic bias, so they will tend to underestimate how long it will take them to get back to their old level of income, assuming that even happens, which makes it too easy for them to rationalize borrowing rather than going into radical belt tightening ASAP. And we’ve seen, dramatically, on how college debt pushers get students to take on debt to “invest” in their education, when for many, the payoff never comes.

 Moreover, despite an enormous increase activity and widespread use of technology, costs of financial intermediation have increased, as Walter Turbewille shows, citing a study by Thomas Philippon:

But the recent IMF paper, Rethinking Financial Deepening: Stability and Growth in Emerging Markets, is particularly deadly. Even though it focused on the impact of financial development on growth in emerging markets, its authors clearly viewed the findings as germane to advanced economies. Their conclusion was that the growth benefits of financial deepening were positive only up to a certain point, and after that point, increased depth became a drag. But what is most surprising about the IMF paper is that the growth benefit of more complex and extensive banking systems topped out at a comparatively low level of size and sophistication. We’ve embedded the paper at the end of this post and strongly urge you to read it in full. (at link)

 The contribution of the IMF paper is that the authors developed a new index to do a comprehensive job of capturing financial activity. Previous work had tended to look either at the size and sophistication of financial institutions, or the depth and complexity of financial markets. The new index incorporates both aspects of financial activity, as well as incorporating access. The writers concede that their measure is still imperfect, but is an improvement over other approaches. They also stress that they are well aware of the issue of establishing that the relationship between the size and complexity of the financial sector is causal, and not a mere correlation:

Empirically, establishing causality from finance to economic growth has been a key challenge. King and Levine (1993) were the first to address this issue in a cross-country regression context. Their paper found that initial levels of financial depth—approximated by the size of the banking system relative to GDP—could predict subsequent growth rates over extended periods, even when controlling for other explanatory variables. Stock market depth was also incorporated later by Levine and Zervos (1998), with the finding that causality went from finance to growth. These results held up with further refinements of the approach, by using instrumental variables (Levine, Loayza, and Beck 2000). In the 2000s, the empirical work continued to evolve with the application of dynamic panel data techniques, using lagged values of the financial variables as instruments and controlling for other determinants of growth (Beck and Levine 2004). The present paper follows this last approach, using similar control variables and econometric techniques to ensure that the relationship is not one of simple correlations but of causality that goes from finance to growth.

This is the money chart:

I have always maintained that the financial industry should be restricted to the minimum size possible, because anything above the level required to bring the generate capital for the “real” economy is inherently parasitic.

It appears that the IMF agrees with me.

It’s Bank Failure Friday!!!

No Comments

We have the 5th bank failure of the year, Edgebrook Bank of Chicago, Illinois.

At this point last year, we had 6 failures.

There is a possibility, though not a probability, that total FDIC bank closures will remain in the single digits this year.

    Full FDIC list

    1. ,
    2. ,
    3. ,

    Here is the Full NCUA list.

    So, here is the graph pr0n with last few years numbers for comparison (FDIC only):

    First the yearly view:

    And then a pic of the year so far:

    Look Out Below!

    No Comments

    If there is a rule in modern investments, it is that they will become increasingly complex, and then the small investors get in, the “Smart Money”, who created the complexity, and there is a crash, where retail investors lose.

    It follows fairly simply from Saroff’s Rule.*

    Well, it’s happening again, less than 7 years after the last crash:

    People buying homes to live in – rather than as investments to be rented out – form the bedrock of a healthy housing market. It was once called the American Dream. Then came the bubble, its collapse, and the new boom that is already a bigger bubble than the prior one in many cities. And in some metro areas, investors are now the majority of buyers!

     In the first quarter, the proportion of owner-occupant buyers fell to 63.2% of all residential sales, down from 65.8% in the fourth quarter last year, and down from 68.6% a year ago, RealtyTrac reported today. It was the lowest quarterly level in the data series going back to 2011.

     Who were the other buyers? Investors. The report defined them as buyers who purchased a property but then had their property tax bill mailed to a different address. And these investors accounted for a record of 36.8% of all home sales.

     In some metro areas, investors went hog-wild, elbowing owner-occupants into minority status. Here are the metro areas with a population of at least 500,000 where this miracle of our “healed” housing market has occurred in Q1, the miracle being that investors make up the majority of all homebuyers:

    ………

     But “institutional investors,” entities that buy 10 or more units a year, accounted for only 3.4% of total sales in Q1, the lowest level in the data series, down from 6.2% in Q1 2014, and from 8.7% during the heyday in Q1 2013. These big investors, including large PE firms that used to buy tens of thousands of units – the “smart money” – have been losing interest for two years. But in the last quarter, they just about pulled up their stakes:

    The investors that are now piling into the market like never before are “smaller, mid-tier, and mom-and-pop investors,” explained RealtyTrac VP Daren Blomquist.

    And these investors are much more highly leveraged:

    Of all investors, 44.7% were all-cash buyers, down from 61% a year ago. Cheap debt is just too tempting. A large variety of easy-money financing options have become available for small investors as “a new crop of nationwide companies has emerged offering financing specifically for investment properties,” Blomquist said. I can attest to that; I get their spam in my inbox.

    Look out below.

    History may not repeat itself, but there is some seriously heavy duty rhyming going on right now.

    I expect another bust sometime in the next 2-3 years.

    If some of the banksters were breaking rocks in a Federal Penitentiary, it would not have repeated itself so soon.

    It would have taken at least a decade for the finance industry to create a new infrastructure of fraud.

    * Saroff’s Rule: If a financial transaction is complex enough to require that a news organization use a cartoon to explain it, its purpose is to deceive.

    It’s Bank Failure Friday!!! (on Saturday)

    No Comments

    We had two credit unions closed on Thursday, bringing the total to 5:

    1. TLC Federal Credit Union, Tillamook, OR
    2. ​New Bethel Federal Credit Union, Portsmough, VA

    Here is the Full NCUA list.

    The odd bit is that this means that there have been more credit union closings than commercial bank closings, 4 banks and 5 credit unions.

    If someone amongst my reader(s) knows if there is some sort of regulatory or financial condition that has caused this, contact me.

    This is weird.

    So, the Flash Crash Was Caused by Some Guy Living in His Parents’ Basement?

    No Comments

    The DoJ is attempting to extradite Nav Sarao to the United States because he allegedly caused the “Flash Crash”.

    While this might be significant for Mr. Sarao, this is missing the forest for the trees.

    If our markets are so unstable as to be tripped into catastrophe by one guy, they are too unstable to exist in their current form:

    Everyone on Wall Street has been talking about this week’s arrest of a little-known UK-based trader on allegations that he caused the May 6, 2010 “Flash Crash.”

    That’s because the consensus view on the Street is that the arrest itself is absolutely ridiculous. In fact, as one trader put it, it’s “beyond ridiculous.”

     Over the past few days, we’ve had several conversations with traders, quantitative analysts, and hedge fund managers. It was the topic of conversation at happy hours and charity events.

     What’s more, there wasn’t a single person we spoke to who bought the argument that one guy wiped billions from the market in a matter of minutes by “spoofing” — a practice in which a trader orders a bunch of trades and then cancels them. It creates artificial demand and manipulates the price of a stock.

     It’s been almost five years since the “Flash Crash” and regulators are suddenly blaming Navinder “Nav” Sarao, a 36-year-old who trades S&P futures from his mom and dad’s house in a London suburb. Yep, regulators think a guy in saggy sweatpants and Nike Airs trading from his parents’ basement did it.

    It also appears that the charges are just plain bogus:

    On May 6, 2010, Sarao’s algo started at 10:20:00 ET and turned off at 14:40:12. The flash crash ignition point was at 14:42:44
    — Eric Scott Hunsader (@nanexllc) April 22, 2015

    Spotting Sarao’s #HFT spoofing algo is like spotting an elephant at a tea party. An eMini chart on 5/6 pic.twitter.com/AN8Ov2VH7u
    — Eric Scott Hunsader (@nanexllc) April 22, 2015


    Round up the usual suspects!

    This prosecution is all about covering up the total vulnerability in the market.

    The “Flash Crash” was not a result of actions of one person. It was a result of the profit strategies of dozens, if not hundreds of actors in the markets, and they all are structured in a way that was calculated to maximize, and exploit, volatility.

    The “market making” capabilities of high frequency traders is a mirage:  As soon as the market experiences upset, they pull out, and create a crash.

    We need to make the markets less responsive, and create greater transaction costs.

    Otherwise, instant market panics will become a routine part of our lives, and the lives of the 99% not extracting rents from the financial markets will suck.

    New York City Wants to Treat Financial Advisers Like Cigarettes

    No Comments

    Basically, they are suggesting that financial advisers be labeled like cigarettes:

    Last week, New York City Comptroller Scott Stringer unveiled a new plan to regulate financial advisers, the first of its kind, that tries to protect the average investor from advisers who don’t have to put their clients’ best interests first.

    Currently, the regulations that apply to financial advisers have a carve out for broker-dealers who can give financial advice but don’t have to act as what is called a fiduciary. What that means in practice is that they can recommend investment products to their clients that serve to make them more money but aren’t necessarily the best or right option for their clients. A recent White House report estimates that this conflicted advice costs workers who invest their savings about $17 billion each year.

    Stringer has proposed that New York State pass legislation that would require financial advisers to disclose whether or not they are fiduciaries and whether or not they have to put a client’s interests ahead of their own. Brokers, financial planners, and retirement advisors who don’t follow the fiduciary standard, which means put their clients’ interests first, would have to state at the outset: “I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks, and expected returns for you.”

    “Like putting a warning label of a package of cigarettes, this would be a warning label for people who want to protect their life savings,” Stringer told ThinkProgress. “If you’re working for a company that’s about the company’s product and not about your client, we want you to own up to that.” The rule, he pointed out, wouldn’t say that these advisers can dole out advice to those who want it, but that they have to clarify the standard they follow.

    ………

    States can’t have a stronger fiduciary standard than the federal regulations. But they do have the authority to regulate disclosure. Stringer’s proposal, while not as strong as the federal one, could have an impact. “The disclosure they’ve proposed is pretty stark, which improves the chances that it would be effective,” Roper said. “At least it’s not a bunch of legalese.” The average investor, usually someone seeking out advice for retirement planning, should be able to understand the warning label that Stringer has laid out.

    That clear language could steer people away from investors who may not serve their needs. “This might make them think…maybe I should go ask someone else,” Hiltonsmith said. “It could actually change the market a little bit and drive people toward fiduciary advisers.”

    Seeing as how the financial industry makes a lot of its money by exploiting these ambiguities, I can understand how they will oppose this tooth and nail.

    Clearly, Regulatory Capture is a Myth

    No Comments

    What a regulator fellating the industry looks like

    Matt Taibbi weighs in on comments made by Andrew Bowden, the SEC’s Director of the agency’s Office of Compliance Inspections and Examinations, at a Stanford Conference of private equity.

    Bowdon’s comments are best described as obsequious, and unfortunately for him, it was caught on video:

    This is courtesy of Yves Smith over at Naked Capitalism, who’s been following the strange story of SEC Examination chief Andrew Bowden’s evolving position on financial corruption for a while.
    That story blew up recently in a remarkable public appearance by Bowden, in which the would-be enforcement official cravenly compliments the industry he supposedly polices and then — get this — jokingly puts forward his own son as a candidate for a job in private equity. On video. You won’t see a more brazen example of regulatory capture anywhere.

    Some brief backstory. Just a little under a year ago, Bowden, the SEC’s Director of Compliance Inspections and Examinations, gave a speech that was remarkably, unusually critical of the Private Equity field. Bowden had conducted a study of the Private Equity business and found that over half of the companies they looked at were guilty of ripping off their clients:

    By far, the most common observation our examiners have made when examining private equity firms has to do with the adviser’s collection of fees and allocation of expenses. When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50 percent of the time.

    To fully explain what Bowden is talking about here would require a much longer article, but the basics go something like this.

    Private Equity reptiles like Mitt Romney make their living borrowing huge sums of money, millions and billions, from investors called “limited partners.” They then take that borrowed money and acquire companies with that cash, sometimes with the company’s consent, sometimes without it.

    The ostensible object of the exercise (at least, this is the way folks in the Private Equity business would describe it) is to make money for the limited partners by acquiring flawed firms, turning them around, and channeling the profits from the reborn target firm back to the investors.

    However, from another point of view, the more immediate object of the exercise is to make money for the Private Equity firm. This can be achieved in virtually countless ways once these takeover parasite-pirates have latched on to their target. But the most reliable way of making cash is to soak the acquired company for huge masses of fees, both legit and not.

    ………

    Anyway, last year, Andrew Bowden at the SEC found that over half of the PE/LBO firms he looked at were doing something wrong with fees.

    ………

    The scam here, as Yves Smith points out, is that the investors think that the Private Equity firm is paying for these managers, while in fact they’re being paid for by the acquired company. As Smith says, this scheme essentially robs the investors:

    From an economic perspective, every dollar that comes out of a portfolio company this way is effectively stolen from the limited partner investors, since they would otherwise have the first claim on the portfolio companies’ cash flows.

    All of which is a complicated way of saying the following: Takeover Artist Jerks use hidden fees to rip investors off.

    Last May, Bowden, a senior SEC official, described this problem as almost epidemic. The SEC looked at 150 companies and over half were guilty of something.

    A year later? They’re not so worried.

    It raised some eyebrows over the course of last summer and fall when the SEC did not follow up on Bowden’s remarks.

    Even some Private Equity trade publications began to wonder aloud where the beef was, noting that “there hasn’t been much additional commentary” from the SEC since Bowden’s aggressive speech last May.

    Bowden himself seemed to walk back some of his comments in an interview last September. “Anecdotally,” he said, “I would say there have been some changes in the behavior on the part of funds and investors and that’s all for the good.”

    Anecdotally? It is a very odd thing to hear a regulator in the middle of a granular, industry-wide examination say that he’s heard that things are getting better. Regulation by rumor is not your typical enforcement MO.

    By this month, Bowden had achieved a complete 180, telling a conference of PE professionals that their business was just “the greatest.”

    This is Bowden on March 5th, on a panel for PE and Venture Capital issues at Stanford. Check out how he pooh-poohs the fact that his SEC has seen “some misconduct,” before he goes on to grovel before his audience:

    ………

    Not the usual posture you’d expect from an enforcement official. He likes the Private Equity business! They make a lot of money! They help people! And that thing about half of those businesses committing fee abuses, that’s just “some misconduct” we found last year. No big deal!

    It got worse, though:

    Bowden: And so my view on the small ones is, I still think this is one of…I tell my son, I have a teenaged son, I tell him, “Cole, you want to be in private equity. That’s where to go, that’s a great business, that’s a really good business. That’ll be good for you.”

    So for me personally, as we share our opinions…

    Questioner [interrupting] I’d love to hire your son, by the way. That’s a deal.

    Bowden’s comments certainly raised a few eyebrows. The LA Times wrote quite critically about them, as did a few other outlets.

    There are some people who will say it’s easy to overreact to something like this. If you listen to the tape, Bowden makes his comments in a joking manner, and everyone laughs. It’s not like he brought his son onstage and had him hand out resumes after the speech.

    But no government regulator with his or her head screwed on correctly would ever go near a joke like that in public. Even if it’s not what it very much appears to be, it sounds incredibly bad.

    And, worse, it reveals an attitude that’s absolutely poisonous among regulators, this fawning worship of people on Wall Street who maybe break a few rules, but that’s okay, because they make tons of money! Can you imagine Elliott Ness giving a speech gushing over what nice cars Al Capone drives? It’s revolting.

    It’s not necessary for regulators to hate the greedy bottom-liners who go around toying with peoples’ jobs and livelihoods using borrowed money.

    It’s not even necessary for regulators to hate those same rich takeover artists for paying half the taxes of most ordinary people, because our bought-off government refuses to close the loophole that allows Mitt Romney to call the money he makes “carried interest” instead of income.

    We don’t need regulators to be out to get anyone. But is a healthy indifference too much to ask? Do we really need for even the regulators to slobber over these people?

    Even if what he said was a joke, the fact that he could make this statement in a room full of potential targets for his investigations, it is a slam dunk for regulatory capture.

    I don’t know if Andrew Bowden is particularly good at his job.

    At this point, I don’t care.

    His head needs to be metaphorically put on the end of a pike as a warning to others.

    Fire him now.

    UK, France, Germany, and Italy to Join the Chinese led Asian Infrastructure Investment Bank, White House Unamused

    No Comments
    After many years with the Congress delaying IMF reform to allow greater influence for emerging market nations, China has created its own analogue, the Asian Infrastructure Investment Bank (AIIB).

    The United States has responded by leaning on nations to not join the bank.

    It’s not working. First, Britain joined the bank despite heavy US pressure:

    The White House has issued a pointed statement declaring it hopes and expects the UK will use its influence to ensure that high standards of governance are upheld in a new Chinese-led investment bank that Britain is to join.

    In a rare public breach in the special relationship, the White House signalled its unease at Britain’s decision to become a founder member of the Asian Infrastructure Investment Bank (AIIB) by raising concerns about whether the new body would meet the standards of the World Bank.

    The $50bn (£33.5bn) bank, which is designed to provide infrastructure funds to the Asia-Pacific region, is viewed with great suspicion by Washington officials, who see it as a rival to the World Bank. They believe Beijing will use the bank to extend its soft power in the region.

    The White House statement reads: “This is the UK’s sovereign decision. We hope and expect that the UK will use its voice to push for adoption of high standards.”

    George Osborne – who has discussed the decision to become a founder member of the investment bank with his US counterpart, Jack Lew – has been the driving force behind developing closer economic ties between Britain and China. The chancellor has led the way in encouraging Chinese investment in the next generation of civil nuclear power plants in the UK and he ensured that the City of London would become the base for the first clearing house for the yuan outside Asia.

    The US administration made clear in no uncertain terms its displeasure about Osborne’s decision to join the AIIB. A US official told the Financial Times: “We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power.”

    Britain was unsurprised by the decision of the US administration to air its concerns in public after the formal announcement that the UK would join the new investment bank. Sources said, in addition to the talks about British plans between the chancellor and the US treasury secretary, British and US officials have been in regular contact ahead of the announcement. UK officials say that, by joining the bank as a founding member, Britain will be able to shape the new institution.

    In its statement to the Guardian, the White House national security council said: “Our position on the AIIB remains clear and consistent. The United States and many major global economies all agree there is a pressing need to enhance infrastructure investment around the world. We believe any new multilateral institution should incorporate the high standards of the World Bank and the regional development banks.

    And then a week later, France, Germany and Italy joined the AIIB:

    A senior US diplomat said it was up to individual countries to decide on joining a new China-led lending body, as media reports said France, Germany and Italy have agreed to follow Britain’s lead and join the Asian Infrastructure Investment Bank (AIIB).

    A growing number of close allies were ignoring Washington’s pressure to stay out of the institution, the Financial Times reported, in a setback for US foreign policy.

    In China the state-owned Xinhua news agency said South Korea, Switzerland and Luxembourg were also considering joining.

    The Financial Times, quoting European officials, said the decision by the four countries to become members of the AIIB was a blow for Washington, which has questioned if the new bank will have high standards of governance and environmental and social safeguards.

    The bank is also seen as contributing to the spread of China’s “soft power” in the region, possibly at the expense of the United States.

    On Tuesday Washington’s top diplomat for east Asia signalled that the concerns about the AIIB remained but the decision on whether to join was up to individual nations.

    “Our messaging to the Chinese consistently has been to welcome investment in infrastructure but to seek unmistakable evidence that this bank … takes as its starting point the high watermark of what other multilateral development banks have done in terms of governance,” US regional assistant secretary of state Daniel Russel said in Seoul.

    If you think that this is really about transparency in the new bank, I have some of Saddam Hussein’s weapons of mass destruction that I want to sell you.

    This is about the US maintaining hegemony over international financial institutions.

    The maintenance of hegemonic control of international institutions, along with the maintenance of an overwhelming military force, seem to be the paramount goals of the United States.

    It is also unsustainable.

    If America’s poodle, the UK, ignored US pressure to join this bank, it is clear that the “Unipolar World” edifice created following the fall of the USSR is a model that the rest of the world is no longer willing to tolerate.

    If the US is forced to go it alone on everything, we will eventually run out of the resources to destabilize unfriendly regimes, rain down Hellfire missiles from drones, prop up despots, and invade other countries.

    It would be much better if the military and foreign policy establishment in the United States realized this, and went forward with a transition to a more sustainable, and more humane, path, but I am not holding my breath on that one.

    How the Creators of Bitcoin Blew It, Part LXIX

    No Comments

    The good folks come up with yet another problem with Bitcoin, this one deriving from a complete lack of understanding of hundreds of jurisprudence.

    This could mean that if a Bitcoin holder has a claim against them, and makes a purchase or a money transfer with Bitcoin, whoever received the funds may be legally required to return the money, even if the person is many transfers down the chain of custody:

    At cryptocurrency and fintech conferences, FT Alphaville often hears Bitcoin enthusiasts make the assertion that Bitcoin is superior to fiat currency because it eliminates debt from the monetary system.

    But this, of course, is a fallacy.

    Bitcoin may have the potential to create a fully-funded reserve system, but it certainly doesn’t eliminate debt from any system.

    At best, Bitcoin’s public ledger records a transfer of digital access rights in the eyes of the clearing network. It does not, however, record or see the terms and conditions of that transfer.

    Indeed, as far as the clearing network is concerned all it knows is that a transfer has occurred. Party A’s wallet has been debited while party B’s wallet has been credited.

    This is something akin to witnessing a physical coin being passed from one hand to the other. Yet what the process doesn’t do is log the conditionality of the transfer — which is still the subject of private agreement and contract law.

    ……… [snipped a Soprano’s based loan sharking example]

    As far as contract law is concerned, even if Satoshi Dice received the bitcoin in good faith from Soprano’s debtor, Soprano himself (despite his unorthodox shake-down tactics) retains a right to seize his property back. And if they passed it on, he can pursue the next party. And so on. Especially since the bitcoin network makes it so easy to follow the trail due to the public nature of the ledger. Eventually, if the coin ends up with a high-value investor or institutional account whose identity is known to the system a formal claim can be made by means of the judicial system.

    It’s these sorts of preceding property claims that the bitcoin system not only fails to eliminate, but arguably empowers by making the paper trail so incredibly transparent. But to what degree is the law really on Tony Soprano’s side when it comes to his claim? (And we’re not referring to his violent retrieval methods, which obviously remain illegal.)

    George K Fogg at law firm Perkins Coie has been thinking about the problem of past claims (or liens) on bitcoins for nearly 14 months now.

    His conclusion: under the United States’ UCC code (uniform commercial code) as long as bitcoins are treated as general intangibles, no high value investor can be sure that an angry Tony Soprano won’t show up one day to claim that the bitcoins they thought they received in a completely unencumbered manner are actually his. In fact, it’s only if and when Tony Soprano publicly renounces his claim to the underlying bitcoin collateral he is owed that the bitcoins stand a chance of being treated as unencumbered. Until then, a hot potato claim risk exists for every future acquirer of Soprano’s bitcoin.

    Indeed, given the high volume of fraud and default in the bitcoin network, chances are most bitcoins have competing claims over them by now. Put another way, there are probably more people with legitimate claims over bitcoins than there are bitcoins. And if they can prove the trail, they can make a legal case for reclamation.

    ………

    The irony of all this for anti-government minded Bitcoin investors is that it’s only by transferring bitcoins into the established financial system that they can be sure to be protected from outstanding Tony Soprano claims on their bitcoin.

    As Fogg notes:

    My libertarian friends have a belief they have created something that is outside of any statutory governance, and my response is you have created something novel that can help in transferring value across borders but you can’t pretend that the UCC doesn’t exist and because it does exist it affects bitcoin. Bitcoin is governed by the UCC. You can be an ostrich and pretend that it’s not covered by it, or you can address that it is in fact covered by the statute and find a way to solve the problem.

    What a surprise.

    A security is created by some libertarian idiot who thought that it could be used to leave our society for Galt’s Gulch.

    Not so much.

    This is not Capitalism, it is Parasitism

    No Comments

    Digby quite clearly demonstrates that remuneration for Wall Street finance types are not an artifact of any capitalist imperative, but instead are out and out looting:

    With all the changes that have taken place on Wall Street since the financial crisis hit – the mergers, the new regulations and the lawsuits that continue to take a toll on banks’ bottom lines, not to mention the Federal Reserve’s demands that they continue to prove their health via regular “stress tests” – one thing remains unaltered.

    It’s the ritual of the annual bonus check handed out to those lucky folks who have survived the job cuts and who continue to endure the Hobbesian life – nasty, brutish and short – on trading desks and in investment banking groups across Wall Street.

    Given the banking industry’s reputation for ruthlessness and its emphasis on the “buyer beware” philosophy, you might expect a difficult environment to be reflected in the size of those bonuses.

    Well, not so fast. This is Wall Street, after all.

    True, Wall Street’s profits aren’t what they used to be. Pretax profits fell 4.2% in 2014 to $16 billion, according to New York’s office of the state comptroller. If you think that sounds like a relatively modest decline, consider that 2014 profits were 33% below 2012 levels, and a whopping 74% below 2009, when Wall Street posted record results as markets zoomed back to life after the crisis and banks profited from ultra-low asset values and interest rates.

    But, reflecting the new clout of banks and bankers, bonus payments didn’t dip in response to this decline. Instead, they rose. In fact, it’s the second year in a row that a decline in profitability has been accompanied by a gain in the size of bonus checks. In 2013, to be sure, the contrast was more marked: a 30.1% decline in profitability, and a 15% increase in bonus payments. This year’s gains are more modest: the New York State comptroller, Thomas DiNapoli, announced the average bonus would edge up only 2%.

    Of course, here’s where the fun and games start on Wall Street. Bonuses don’t come out of a bank’s profits, but out of its revenues. It’s only folks like you and I – and, one would hope, at least some of the investors – who might want to take a look at these numbers and tie them to profits. Because what good is it rewarding employees for bringing revenue through the door if it isn’t profitable revenue?

    This year, bonus payouts will amount to a whopping 170% of the profits reported by New York stock exchange member firms – profits that continue to be eroded by legal settlements and regulatory expenses. Back in 2009, that figure was slightly more than 36% of profits, and it has crept steadily higher.

    The people working on Wall Street think that they are Galtian superman sitting astride the economy.

    They are not.  They are parasites, sucking the marrow from our economy.

    In the words of Ayn Rand, these would be moochers and looters, not producers.

    H/t to Tom Sullivan at Hullabaloo, whose post you should read if you are a Chronicles of Riddick fan.

    Lockheed Martin Promises a Pony………

    No Comments

    Lockheed Martin is now saying that it will be able cut the cost of the F-35:

    Lockheed Martin is on track to slash 30 per cent from the cost of each F-35 joint strike fighter, bringing the price of the controversial aircraft below that of previous, less capable generations of fighters, Marillyn Hewson, the company’s chief executive, said on Wednesday.

    The reduction would bring the cost of each F-35A — the version for the US air force — down to less than $80m from between $110m and $115m each. Such a saving could save billions of dollars in procurement costs for the programme, currently estimated at $396bn for more than 3,000 aircraft for the US and key allies.

    Winslow Wheeler, of the Project On Government Oversight (POGO) estimates the cost of the F-35 to be at least twice that.

    I would also note that the F-35, as delivered, is not combat capable.

    It will will have beta software, its maintenance software will not be close to operation, and it will be unable to carry the bomb that is crucial to its mission until 2022.

    Am I the only one who thinks that Lockheed’s price estimates are based on the economics of the 1954 Looney Tune Design for Leaving?

    You know that one. Daffy Duck is trying to sell a push button house of the future, and the final punch line is, “For a small price, I can install this little blue button to get you down!”

    All I can say is that whoever is going to deploy this clusterf%$# is going to be paying for a lot of blue buttons.