Tag: Finance

The Root of Currency is “Current”, and Cryptocurrency Isn’t

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That’s why a court has ruled that a $100 million initial crypto coin offering (ICO) by Kin was an illegal unregistered securities sale.

When all is said and done, currency is supposed to allow one to spend a store of value on goods and services essentially instantly.

Even the most established crypto-currency, Bitcoin, takes hours, if not days, to process a transaction.
It is not a meaningful medium of exchange for even the most basic commercial activities:

The 2017 launch of the Kin cryptocurrency broke federal securities laws, a federal judge has ruled. Federal law requires anyone who offers a new security to the general public to register with the Securities and Exchange Commission. The messaging app maker Kik didn’t do that when it sold $100 million worth of Kin in 2017.

The company argued that Kin was legally a new virtual currency, not a security. In a Wednesday ruling, Judge Alvin Hellerstein rejected that claim. The ruling could have big consequences for the cryptocurrency world.

Since 2016, hundreds of cryptocurrency projects have held Kin-like “initial coin offerings” that raised millions—in a few cases, hundreds of millions—of dollars. Few of these offerings went through the traditional steps required to register a securities offering with the SEC. So Wednesday’s ruling could create legal headaches for existing blockchain projects launched via an ICO. It also limits the options for launching cryptocurrencies in the future.

Judge Hellerstein gave Kik and the SEC three weeks to come up with a joint recommendation on appropriate remedies. Kik says it is considering appealing the ruling.
How a cryptocurrency offering is like an orange grove

A security is an asset that investors purchase in hopes of making a profit. It includes traditional investment vehicles like stocks and bonds, but it also includes a catch-all category called an investment contract. The Supreme Court laid out the legal criteria for investment contracts in a landmark 1946 ruling.

………

In his Wednesday ruling, Hellerstein concluded that similar logic applies to the Kin tokens Kik sold in 2017. Officially, Kin owners are not entitled to any profits generated by the Kin ecosystem. But practically speaking, people bought Kin because they hoped a thriving Kin ecosystem would push up Kin’s value the same way that bitcoins and ether had become more valuable over time.

Hellerstein notes that Kik CEO Ted Livingston repeatedly touted Kin’s potential as an investment opportunity. “If you could grow the demand for it, then the price—the value of that cryptocurrency would go up, such that if you set some aside for yourself at the beginning, you could make a lot of money,” Livingston said.

………

This was a common way to bootstrap a new cryptocurrency during the 2017 ICO boom, and the Kik ruling could slam the door shut on this method for getting a new blockchain project off the ground. Registering as a security comes with a lot of regulations. Complying with those regulations will, at a minimum, require a lot of legal work. And some cryptocurrency projects might not fit into existing SEC rules at all.

This is a good thing.

ICO’s are a recipe for fraud.

Federal Reserve Open Market Committee Issues Report

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 A brief summary of their statement is, “Sh%$ is f%$#ed up, and we have to do something.”

Federal Reserve officials expect to leave interest rates near zero for years — through at least 2023 — and will tolerate periods of higher inflation as they try to revive the labor market and economy, based on their September policy statement and economic projections released Wednesday.

The announcement codifies that the Fed chair, Jerome H. Powell, and his colleagues plan to be extraordinarily patient as they try to cushion the economy in the months and years ahead.

The policy-setting Federal Open Market Committee “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time,” officials said in their statement.

………

The Fed updated its Summary of Economic Projections, a set of estimates for how the economy and interest rates will develop in coming years. Officials saw unemployment ending 2020 at a lower rate than it previously forecast: The median official expects the rate to average 7.6 percent over the final three months of the year, compared with 9.3 percent when the Fed released its last set of projections in June.

It’s not a bad policy, but it comes from a horrible reality.

This Will Not End Well

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Nothing to see here ……… Move along

There have been some very odd, and VERY large movements in the US stock market driven by a huge purchase of equity derivatives (Warren Buffet defined derivatives, “Financial weapons of mass destruction.”) of tech stocks.
Someone has been making huge, and risky, speculative bets.

A cynic might think that some deep pocketed operator is attempting to use their deep pockets to move the market, and then cash out in a classic, “Pump and dump.”

Well, now it seems that Softbank, whose whole model is to pump up some hair-brained operation (**cough** WeWork **cough**) and then find some idiots to buy their stake, is the “Nasdaq whale”.

Let’s be clear, when you are nicknamed a whale in finance, it does not bode well. Just ask JP Morgan Chase’s, “London Whale,” Bruno Iksil.

The problem is that it is likely that the taxpayers are going to be paying out when this all goes pear shaped:

SoftBank is the “Nasdaq whale” that has bought billions of dollars’ worth of US equity derivatives in a series of trades that stoked the fevered rally in big tech stocks before a sharp pullback on Thursday and Friday, according to people familiar with the matter.

………

The aggressive move into the options market marks a new chapter for the investment powerhouse, which in recent years has made huge bets on privately held technology start-ups through its $100bn Vision Fund. After the coronavirus market tumult hit those bets, the company established an asset management unit for public investments using capital contributed by its founder, Masayoshi Son.

Now it has also made a splash in trading derivatives linked to some of those new investments, which has shocked market veterans. “These are some of the biggest trades I’ve seen in 20 years of doing this,” said one derivatives-focused US hedge fund manager. “The flow is huge.”

………

One person familiar with SoftBank’s trades said it was “gobbling up” options on a scale that was even making some people within the organisation nervous. “People are caught with their pants down, massively short. This can continue. The whale is still hungry.”

………

The overall nominal value of calls traded on individual US stocks has averaged $335bn a day over the past two weeks, according to Goldman Sachs. That is more than triple the rolling average between 2017 and 2019. The retail trading boom has played a big part in the frenzy, but investors say the size of many recent option purchases are far too big to be retail-driven.

………

The size and aggressiveness of the mysterious call buyer, coupled with the summer trading lull, has been a big factor in the buoyant performance of many big tech names as well as the broader US stock market, according to Mr McElligott. This week, he warned that dynamics around options meant the heavy purchases forced banks on the other side of the trades to hedge themselves by buying stocks, in a “classic ‘tail wags the dog’ feedback loop”.

Meanwhile, people are dumping Softbank stocks, because it is self-evidently clear that what they are doing now is bat-sh%$ insane.

I’m not sure if this is a, “Put your money in a bank account,” moment, a, “Put your money in cash,” moment, a, “Put your money in gold,” moment, or a, “Put your money in canned goods,” moment.

In any case, don’t go long on anything if you might need that money in the short term.

We are in a Wile E. Coyote moment right now.

Today in Prosecutorial Cluelessness

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In response to stories noting irregularities at the now shuttered German credit card transaction firm Wirecard, regulators went to Prosecutors initiated an investigation ……… of the journalists.

Now that the firm has collapsed in an orgy of fraud, prosecutors are calling backsies:

The Munich prosecutor has dropped its investigation into two Financial Times journalists, who were accused by the German financial watchdog of potential market manipulation over their reports about accounting irregularities at payments processor Wirecard.

The criminal prosecution office in Munich said on Thursday it had “suspended the investigative proceedings” against the two FT journalists after they “did not reveal sufficient evidence to support the suspicious facts” raised by BaFin, the German watchdog.

BaFin said on Thursday that it had “no objection” to the prosecutor dropping its investigation into the FT journalists. It added that its parallel criminal complaint against short-sellers alleging market manipulation on Wirecard shares was still ongoing.

The move comes 10 weeks after Wirecard declared insolvency, having admitted that about €1.9bn in cash was missing from its accounts. Its collapse, which has turned into one of Germany’s biggest financial scandals, followed years of reports by the FT that Wirecard’s accounts were misleading.

The Munich prosecutor said its investigations found that the FT’s reports “are basically correct and at least from the point of view of the information available at the time, it was neither false nor misleading. There were no direct, concrete contacts with short-sellers.”

The criminal complaint against Dan McCrum and Stefania Palma was filed by BaFin in April 2019 after the FT published articles by the two earlier that year alleging that Wirecard had been inflating its revenues by using forged and backdated contracts that raised questions over the company’s accounting.

In case your are wondering, bank fraud, and regulatory capture are not exclusive to the “Anglo-Saxon” nations.

Tweet of the Day

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Rancid lawlessness has been happening in the white collar world for twenty years with no handcuffs so it’s not a surprise to see it everywhere else. The trickle down theory works apparently.

I mean Elon Musk openly committed securities fraud.

— Matt Stoller (@matthewstoller) August 26, 2020

These days, it seems that about 80% of what goes on in Wall Street, and in Silicon Valley is unproductive bullsh%$ that is regulatory arbitrage at best, and more likely outright criminality.

As the saying goes, a fish rots from the head.

This is Worse than I Had Imagined

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I knew that hedge fund fees were excessive, but run the numbers, and it is beyond my wildest imaginings.

Their fees amount to 64% of all returns:

If you already see hedge fund fees as exorbitant, you ain’t seen nothing yet. Over the past two decades, the hedge fund industry has kept 64 cents of every dollar of gross profits that it has generated above the risk-free rate.

You’d be excused for thinking this is a mathematical impossibility. The predominant fee arrangement in the hedge fund industry is the so-called 2-and-20 fee structure, under which a fund charges an annual management fee of 2% of assets under management and a performance incentive fee of 20% of any profits. So how can hedge funds keep more than 20 cents of every dollar of profit, on top of management fees?

The answer is provided in a new study that the National Bureau of Economic Research recently began circulating. Entitled “The Performance of Hedge Fund Performance Fees,” the study was conducted by finance professors Itzhak Ben-David and Justin Birru, both of Ohio State University, and Andrea Rossi of the University of Arizona.

The professors analyzed a comprehensive hedge fund database containing nearly 6,000 funds over the 22 years from 1995 through 2016. Over that period these hedge funds collectively produced total gross profits of $316.8 billion. Of this total, fund managers kept $202 billion ($88.7 billion in management fees and $113.3 billion in performance incentive fees). The remainder—$113.3 billion, or 35.8% of total gross profits — went to investors. (See the chart below.)

That is almost 2/3 of returns, which means that even by hedge funds extravagant claims, they would never exceed the numbers of things like index funds.

World Class Snark

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This take-down is a truly a thing of beauty.

It’s indisputable that Kamala and Beau took on the big banks as aggressively as the Obama/Biden administration. https://t.co/q450YROxBs

— Jesse Eisinger (@eisingerj) August 11, 2020

In case you have been living in a cave, the Obama Administration’s response to the endemic fraud and corruption by the banksters are best described by the legal term, “Nolle prosequi.”

Powerful Bank CEOs Lead to Money Laundering

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A study shows that the more unchecked authority that bank CEOs have, the more likely that the banks will be involved in money laundering and other criminality.

Obviously, correlation does not prove causation, but ultra-powerful CEOs tend to be indistinguishable from sociopaths, so criminality logically follows their imperative to hit “the numbers”.

We have seen again and again how rock-star CEOs lead to unbalanced people running companies for their own personal benefit and twisted egos:

Banks with powerful CEO’s and smaller, less independent, boards are more likely to take risks and be susceptible to money laundering, according to new research led by the University of East Anglia (UEA).

The study tested for a link between bank risk and enforcements issued by US regulators for money laundering in a sample of 960 publicly listed US banks during the period 2004-2015.

The results, published in the International Journal of Finance and Economics, show that money laundering enforcements are associated with an increase in bank risk on several measures of risk. In addition, the impact of money laundering is heightened by the presence of powerful CEOs and only partly mitigated by large and independent executive boards.

It’s not just banks that need to abolish the Cult of the CEO.

Gee, You Think?

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There was a massive surge in stock trading just before Kodak announced a massive federal loan to make medical reagents for the pandemic.

Elizabeth Warren has noticed this as well:

Sen. Elizabeth Warren on Tuesday asked the Securities and Exchange Commission to investigate potential insider trading surrounding Eastman Kodak’s recent announcement that it would receive a $765 million government loan to start producing the chemical ingredients needed to make pharmaceuticals.

The day before the loan was announced, more than 1 million shares of Kodak’s stock traded hands compared with a daily average of 236,479 over the past year, Warren (D-Mass.) said in a letter to SEC Chair Jay Clayton. The company’s stock price rose about 20 percent that day, July 27, and increased more than 200 percent the next day, July 28, when the loan was announced.

Warren also noted that shortly before the announcement, James Continenza, Kodak’s executive chairman, purchased about 46,700 shares. The purchase “while the company was involved in secret negotiations with the government over a lucrative contract raises questions about whether these executives potentially made investment decisions based on material, non-public information derived from their positions,” Warren said.

………

The Wall Street Journal reported Tuesday that the SEC had opened an investigation of the circumstances surrounding the announcement of Kodak’s loan.

The SEC declined to comment on Warren’s letter and the WSJ report of an investigation.

While there are indications that Kodak insiders were involved, but my money is on Trump administration officials being involved in this as well, because corruption about the only thing that Trump and Evil Minions™ do at all well.

Stock Options Don’t Exercise Themselves

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Despite profits cratering like a Boeing 737 MAX with an Indonesian pilot, the captains of industry in the United States are continuing their stock buy-backs unabated.

This is not about preserving shareholder value, this is about keeping those executives stock options above water.  It is corrupt, and arguably fraud:

Corporate America is finding it hard to kick the share buyback habit, even after the US slipped into its worst recession in decades.

Total buybacks are expected to drop this year as the downturn caused by coronavirus saps corporate profits, prompting many US blue-chips to suspend or cut back share repurchases. Yet companies in the S&P 500 that have reported second-quarter earnings so far have reduced the number of their outstanding shares by an average of 0.3 per cent from the previous quarter, according to calculations from Credit Suisse.

Updates showed that some of the largest US multinationals continued to buy back their own stock or even accelerated stock repurchases.

………

David Lebovitz, global market strategist for JPMorgan Asset Management, noted that the buybacks were “not happening everywhere”, but were “driven by specific sectors and stocks”. He added that financial and materials companies were potentially more willing to engage in buybacks through the downturn, because their stocks have not advanced as much as companies in other sectors since the lows in March.

Mr. Lebovitz is lying, and he knows it.

This is about executives boosting their own bottom line, not the company’s.

You Know that Private Equity is Cooking the Books When

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Even the Pink Paper, aka The Financial Times, calls out the industry for the fictitious returns that the industry reports:

Ever wondered about the extraordinary performance figures that listed private equity firms trumpet in their official stock market filings?

Take, for instance, the latest Form 10-K issued by Apollo, one of the world’s largest buyout groups. This claims that its private equity funds have “consistently produced attractive long-term investment returns . . . generating a 39 per cent gross internal rate of return (IRR) on a compound basis from inception through December 31, 2019”.

Or how about the one from KKR, which says it has “generated a cumulative gross IRR of 25.6 per cent” since the firm’s inception back in 1976?

It’s not just the eye-popping scale of these returns that captures the attention. It’s their amazing “since inception” consistency. Not only do the firms generate stratospheric numbers — far higher than anything produced by the boring old stock market — but they can apparently do it year in, year out, with no decay in returns.

………

Take Apollo, for example. Its long-term IRR has barely moved from the 39 per cent level over the past several decades. True, it did hit 40 per cent in 2008, before dropping back by a full percentage point the following year. But since then it has been like a stuck record. Financial crises? Great recessions? Market fluctuations? It seems that nothing can knock it off that 39 per cent.

It’s a similar story with KKR. The firm’s IRR since inception has fallen by just 0.7 of a percentage point in the years since 2007 and, at 25.6 per cent, remains barely below the 26.1 per cent return generated by its early “legacy” funds between 1976 and 1996.

………

But what’s concerning is the ease with which this mathematical circularity has been allowed to create a distorted impression. The main audience for private equity to date has been large, so-called “sophisticated investors”. The fact that these absurd numbers still get headline exposure makes one wonder whether these investors understand them. That is disturbing.

Even more worrying is the way that policymakers appear to have set these financial pig-iron statistics in stone. The industry standard for reporting — the Global Investment Performance Standards — actually makes it mandatory for private equity to report a since-inception IRR or “money-weighted return”.

………

Realistic numbers matter. The US authorities are thinking of letting the American public loose on private equity with their 401(k) pension plans. Retail investors need to know what they are getting into. It’s time the way private equity reports performance was rethought.

This is conscious fraud, no different in intent, and larger in scale than anything that Bernie Madoff ever imagined.

The Vampire Squid Skates Again

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Goldman Sachs, which was a conspirator in the Malaysian 1MDB scandal, will scate with a payment of a $2½ billion dollars.

As a part of this deal, the people at Goldman Sachs who personally aided, and personally profited from, the theft of billions of Malaysian state resources, will be getting get out of jail free cards.

This is disgusting:

Only Goldman Sachs. Last week, after months of public sparring and days of tough in-person negotiations, the Wall Street bank finally reached a deal with Malaysia over allegations that it had helped a former prime minister loot billions of dollars from the state investment fund, 1MDB.

Goldman will fork out $2.5bn, instead of the $7.5bn the finance minster had originally demanded, and the Malaysian government agreed to drop criminal charges against the bank and cease legal proceedings against 17 current and former Goldman directors.

………

Evercore’s Glenn Schorr argues that “the only thing that matters is, will this prevent Goldman from doing business in the way they need to do business? I believe it won’t.” If history — and the Malaysian result — is any guide, Mr Schorr is on to something.

Mr. Schorr means that he hopes that GS will continue business as usual.

What is left unspoken is that business as usual for the, “Great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money,” is corruption, looting, and fraud.

Self Dealing and Corruption at ICANN

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Just about a week after penning essays suggesting that “Geeks Must Be In Charge of the Internet,”* former ICANN chairman Fadi Chehadé has been revealed to be the CEO of the sketchy hedge fund that was trying to take over the .org registry.

There have long been allegations that the transfer of the registry to a for-profit entity, particularly when juxtaposed with the removal of price caps by ICANN just before the attempt began.

There needs to be a dive into corruption within ICANN, because what is going on now is almost certainly in violation of the requirements for non-profits in the United States and in California, where it is headquartered:

Former ICANN CEO Fadi Chehadé is currently listed as the co-CEO of Ethos Capital on the firm’s website.

Ethos Capital tried to buy Public Interest Registry, the non-profit that runs .org domains, but ICANN denied the transaction.

Chehadé’s name was nowhere on Ethos’ website when it announced the .org transaction. His involvement quickly became public because of Whois data for one of Ethos Capital’s domain names. The private equity company admitted that Chehadé was an advisor on the deal.

For months, the Ethos Capital website listed only two employees: CEO Erik Brooks and Chief Purpose Officer Nora Abusitta-Ouri. Abusitta-Ouri worked with Chehadé at ICANN.

The website change listing Chehadé as co-CEO appears to have happened very recently. The last Wayback Machine capture from June 15 did not show him. Elliot Silver spotted the difference today.

Many industry observers may wonder if Chehadé was pegged to be a co-CEO all along, only omitted from the website to avoid more controversy.

I hope that before this is over, some current and former senior staffers at ICANN need to be frog-marched out of their offices in handcuffs.

It’s the only way to fix the organization.

*Keep the Geeks in Charge of the Internet, Project Syndicate, July 7, 2020.

From the Department of “Well, Duh!”

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A leaked document has revealed that the FBI is worried that some private equity firms are involved in money laundering.

Well, color me f%$%#ing stunned.

Private equity, which generates profits from the obscene fees that it charges for the services it allegedly provides, is nothing at all like money laundering, which generates profits from the obscene fees that it charges for the services it allegedly provides:

The U.S. Federal Bureau of Investigation believes firms in the nearly $10-trillion private investment funds industry are being used as vehicles for laundering money at scale, according to a leaked intelligence bulletin prepared by the agency in May.

“Threat actors” — including criminals in it for the money and foreign adversaries — “use the private placement of funds, including investments offered by hedge funds and private equity firms” to reintegrate dirty money into the legitimate global financial system, according to the bulletin.

It also said the industry lacks adequate anti-money laundering programs and called for greater scrutiny by regulators, which have yet to issue rules for the industry.

Corruption and money-laundering is a feature of private equity, not a bug.

I Think That the Fracking Bubble Has Officially Burst

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I have been observing for some time now that the fracking bubble is unsustainable.

Even ignoring the anthropogenic climate change issues,* fracked oil and gas is expensive, and the drop-off on wells is 10 to 20 times that of conventional wells.

Simply put, it’s been a game of musical chairs, with investors and executives fobbing debt off on idiots, and they have run out of idiots

Basically, this was looting disguised as the energy industry, as evidenced by spending that would make Dennis Koslowski† blush.

The biggest player in the field, Chesapeake Energy, has filed for bankruptcy, and the looting is on full display:

The fracking giant’s bankruptcy filing comes following a financial mess at the company that included no budgets, a massive wine collection and a nine-figure bill for parking garages, sources told CNBC’s David Faber.

 CEO Robert D. “Doug” Lawler found in examining the company’s books a $110 million bill for two parking garages, Faber reported Monday. Other revelations include a wine collection in a cave hidden behind a broom closet in the Chesapeake office. Extravagances further included a season ticket package to the NBA’s Oklahoma City Thunder that was the biggest in the league and a lavish campus that was modeled after Duke University, complete with bee keepers, botox treatments and chaplains for employees.

Another big player in fracking, Lilis Energy has filed for bankruptcy as well.

Don’t worry about the senior executives who drove the companies into the ground though, they get their multi-million dollar retention bonuses anyway.

We really need to fix our corporate bankruptcy laws.

*Apart from that Mrs. Lincoln, how was the play?
†Dennis Kozlowski, the former head of Tyco international, who had the company buy him things like art and $6,000 shower curtains.

This Is Going to Be Ugly

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It now appears that office rents in Manhattan are set to fall by more than a quarter.

Considering the leverage of most developers, and the relatively short term of real estate loans, they typically have to be refinanced every 5 years, we are looking at a huge number of bad loans popping up in the not too distant future:

Manhattan’s office rents are likely to plummet to the lowest level since 2012 if the U.S. economy doesn’t recover quickly from the pandemic.

Asking rents could decline 26% to about $62.47 a square foot (roughly $672 per square meter) in a prolonged recession, according to a report from Savills. Rents haven’t fallen to that level since 2012, the real estate services firm said.

………
Savills’ research used indicators that it says are correlated to rental rates, including gross domestic product, unemployment and office vacancies in Manhattan.

Also, there is going to be a f%$# load of work from home which is likely to permanently depress office demand, because literally hundreds of thousands employers have discovered that you don’t have to have someone in the office 5 days a week. and that it saves them a fair chunk of change.

Round Up the Usual Suspects

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What a surprise. The Trump administration official running the bailout is directing aid to his family’s business:

Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin have become the public faces of the $3 trillion federal coronavirus bailout. Behind the scenes, however, the Treasury’s responsibilities have fallen largely to the 42-year-old deputy secretary, Justin Muzinich.

A major beneficiary of that bailout so far: Muzinich & Co., the asset manager founded by his father where Justin served as president before joining the administration. He reported owning a stake worth at least $60 million when he entered government in 2017.

Today, Muzinich retains financial ties to the firm through an opaque transaction in which he transferred his shares in the privately held company to his father. Ethics experts say the arrangement is troubling because his father received the shares for no money up front, and it appears possible that Muzinich can simply get his stake back after leaving government.

Corruption in the Treasury Department is nothing new.

Timothy Geithner got a VERY comfortable sinecure (I use this word a lot) as a back-end payoff for his “foaming the runway” for banks on the backs of homeowners.

Still, this does seem to be a bit brazen.

One Word Makes a Big Difference

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The head of Fidelity International, Anne Richards, is predicting a global insolvency crisis.

The important thing here is that she says that there will be a SOLVENCY crisis, and not a LIQUIDITY crisis.

This is important.

If you are illiquid, you lack the necessary cash to make payments right now, but if you are insolvent, you owe more than your assets.

If you are insolvent, you are broke, bankrupt, or busted.

Absent a bailout or buyout (usually at a discount) an insolvent operation is done.

It is much worse than a liquidity crisis, and it’s what happens when corporations burn through their assets buying up their own stock instead of investing in the business.

If she is right, and I’m inclined to believe that she is, his is going to get ugly, with zombie companies holding back the econom for years.