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Magic Show Returns to Wall Street

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Quantitative easing is back.  For those of you who still aren’t familiar with what quantitative easing is, I have provided a link to this short, funny cartoon, which explains everything.

The first two phases of quantitative easing brought enormous gains to the stock market.  In fact, that was probably all they accomplished.  Nevertheless, if there had been no QE or QE 2, most people’s 401(k) plans would be worth only a fraction of what they are worth today.  The idea was that the “wealth effect” provided by an inflated stock market would both enable and encourage people to buy houses, new cars and other “big ticket” items – thus bringing demand back to the economy.  Since the American economy is 70 percent consumer-drivendemand is the engine that creates new jobs.

It took a while for most of us to understand quantitative easing’s impact on the stock market.  After the Fed began its program to buy $600 billion in mortgage-backed securities in November of 2008, some suspicious trading patterns began to emerge.  I voiced my own “conspiracy theory” back on December 18, 2008:

I have a pet theory concerning the almost-daily spate of “late-day rallies” in the equities markets.  I’ve discussed it with some knowledgeable investors.  I suspect that some of the bailout money squandered by Treasury Secretary Paulson has found its way into the hands of some miscreants who are using this money to manipulate the stock markets.  I have a hunch that their plan is to run up stock prices at the end of the day before those numbers have a chance to settle back down to the level where the market would normally have them.  The inflated “closing price” for the day is then perceived as the market value of the stock.  This plan would be an effort to con investors into believing that the market has pulled out of its slump.  Eventually the victims would find themselves hosed once again at the next “market correction”.

Felix Salmon eventually provided this critique of the obsession with closing levels and – beyond that – the performance of a stock on one particular day:

Or, most invidiously, the idea that the most interesting and important time period when looking at the stock market is one day.  The single most reported statistic with regard to the stock market is where it closed, today, compared to where it closed yesterday.  It’s an utterly random and pointless number, but because the media treats it with such reverence, the public inevitably gets the impression that it matters.

In March of 2009, those suspicious “late day rallies” returned and by August of that year, the process was explained as the “POMO effect” in a paper by Precision Capital Management entitled, “A Grand Unified Theory of Market Manipulation”.

By the time QE 2 actually started on November 12, 2010 – most investors were familiar with how the game would be played:  The New York Fed would conduct POMO auctions, wherein it would purchase Treasury securities – worth billions of dollars – on an almost-daily basis.  After the auctions, the Primary Dealers would take the sales proceeds to their proprietary trading desks, where the funds would be leveraged and used to purchase stocks.  Thanks to QE 2, the stock market enjoyed another nice run.

This time around, QE 3 will involve the purchase of mortgage-backed securities, as did QE 1.  Unfortunately, the New York Fed’s  new POMO schedule is not nearly as informative as it was during QE1 and QE 2, when we were provided with a list of the dates and times when the POMO auctions would take place.  Back then, the FRBNY made it relatively easy to anticipate when you might see some of those good-old, late-day rallies.  The new POMO schedule simply informs us that  “(t)he Desk plans to purchase $23 billion in additional agency MBS through the end of September.”  We are also advised that with respect to the September 14 – October 11 time frame,  “(t)he Desk plans to purchase approximately $37 billion in its reinvestment purchase operations over the noted monthly period.”

It is pretty obvious that the New York Fed does not want the “little people” partaking in the windfalls enjoyed by the prop traders for the Primary Dealers as was the case during QE 1 and QE 2.  This probably explains the choice of language used at the top of the website’s POMO schedule page:

In order to ensure the transparency of its agency mortgage-backed securities (MBS) transactions, the Open Market Trading Desk (the Desk) at the New York Fed will publish historical operational results, including information on the transaction prices in individual operations, at the end of each monthly period shown in the table below.

In other words, the New York Fed’s idea of transparency does not involve disclosure of the scheduling of its agency MBS transactions before they occur.  That information is none of your damned business!

Manifesto

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For the past few years, a central mission of this blog has been to focus on Washington’s unending efforts to protect, pamper and bail out the Wall Street megabanks at taxpayer expense.  From Maiden Lane III to TARP and through countless “backdoor bailouts”, the Federal Reserve and the Treasury Department have been pumping money into businesses which should have gone bankrupt in 2008.  Worse yet, President Obama and Attorney General Eric Hold-harmless have expressed no interest in bringing charges against those miscreants responsible for causing the financial crisis.  The Federal Reserve’s latest update to its Survey of Consumer Finances for 2010 revealed that during the period of 2007-2010, the median family net worth declined by a whopping thirty-eight percent.  Despite the massive extent of wealth destruction caused by the financial crisis, our government is doing nothing about it.

I have always been a fan of economist John Hussman of the Hussman Funds, whose Weekly Market Comment essays are frequently referenced on this website.  Professor Hussman’s most recent piece, “The Heart of the Matter” serves as a manifesto of how the financial crisis was caused, why nothing was done about it and why it is happening again both in the United States and in Europe.  Beyond that, Professor Hussman offers some suggestions for remedying this unaddressed and unresolved set of circumstances.  It is difficult to single out a passage to quote because every word of Hussman’s latest Market Comment is precious.  Be sure to read it.  What I present here are some hints as to the significance of this important essay:

The ongoing debate about the economy continues along largely partisan lines, with conservatives arguing that taxes just aren’t low enough, and the economy should be freed of regulations, while liberals argue that the economy needs larger government programs and grand stimulus initiatives.

Lost in this debate is any recognition of the problem that lies at the heart of the matter:  a warped financial system, both in the U.S. and globally, that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad.

Specifically, over the past 15 years, the global financial system – encouraged by misguided policy and short-sighted monetary interventions – has lost its function of directing scarce capital toward projects that enhance the world’s standard of living. Instead, the financial system has been transformed into a self-serving, grotesque casino that misallocates scarce savings, begs for and encourages speculative bubbles, refuses to restructure bad debt, and demands that the most reckless stewards of capital should be rewarded through bailouts that transfer bad debt from private balance sheets to the public balance sheet.

*   *   *

By our analysis, the U.S. economy is presently entering a recession.  Not next year; not later this year; but now.  We expect this to become increasingly evident in the coming months, but through a constant process of denial in which every deterioration is dismissed as transitory, and every positive outlier is celebrated as a resumption of growth.  To a large extent, this downturn is a “boomerang” from the credit crisis we experienced several years ago.  The chain of events is as follows:

Financial deregulation and monetary negligence -> Housing bubble -> Credit crisis marked by failure to restructure bad debt -> Global recession -> Government deficits in U.S. and globally -> Conflict between single currency and disparate fiscal policies in Europe -> Austerity -> European recession and credit strains -> Global recession.

In effect, we’re going into another recession because we never effectively addressed the problems that produced the first one, leaving us unusually vulnerable to aftershocks.  Our economic malaise is the result of a whole chain of bad decisions that have distorted the financial markets in ways that make recurring crisis inevitable.

*   *   *

Every major bank is funded partially by depositors, but those deposits typically represent only about 60% of the funding.  The rest is debt to the bank’s own bondholders, and equity of its stockholders.  When a country like Spain goes in to save a failing bank like Bankia – and does so by buying stock in the bank – the government is putting its citizens in a “first loss” position that protects the bondholders at public expense.  This has been called “nationalization” because Spain now owns most of the stock, but the rescue has no element of restructuring at all.  All of the bank’s liabilities – even to its own bondholders – are protected at public expense.  So in order to defend bank bondholders, Spain is increasing the public debt burden of its own citizens.  This approach is madness, because Spain’s citizens will ultimately suffer the consequences by eventual budget austerity or risk of government debt default.

The way to restructure a bank is to take it into receivership, write down the bad assets, wipe out the stockholders and much of the subordinated debt, and then recapitalize the remaining entity by selling it back into the private market.  Depositors don’t lose a dime.  While the U.S. appropriately restructured General Motors – wiping out stock, renegotiating contracts, and subjecting bondholders to haircuts – the banking system was largely untouched.

*   *   *

If it seems as if the global economy has learned nothing, it is because evidently the global economy has learned nothing.  The right thing to do, again, is to take receivership of insolvent banks and wipe out the stock and subordinated debt, using the borrowed funds to protect depositors in the event that the losses run deep enough to eat through the intervening layers of liabilities (which is doubtful), and otherwise using the borrowed funds to stimulate the economy after the restructuring occurs.  We’re going to keep having crises until global leaders recognize that short of creating hyperinflation (which also subordinates the public, in this case by destroying the value of currency), there is no substitute for debt restructuring.

For some insight as to why the American megabanks were never taken into temporary receivership, it is useful to look back to February of 2010 when Michael Shedlock (a/k/a“Mish”) provided us with a handy summary of the 224-page Quarterly Report from SIGTARP (the Special Investigator General for TARP — Neil Barofsky).  My favorite comment from Mish appeared near the conclusion of his summary:

Clearly TARP was a complete failure, that is assuming the goals of TARP were as stated.

My belief is the benefits of TARP and the entire alphabet soup of lending facilities was not as stated by Bernanke and Geithner, but rather to shift as much responsibility as quickly as possible on to the backs of taxpayers while trumping up nonsensical benefits of doing so.  This was done to bail out the banks at any and all cost to the taxpayers.

Was this a huge conspiracy by the Fed and Treasury to benefit the banks at taxpayer expense?  Of course it was, and the conspiracy is unraveling as documented in this report and as documented in AIG Coverup Conspiracy Unravels.

On January 29 2010, David Reilly wrote an article for Bloomberg BusinessWeek concerning the previous week’s hearing before the House Committee on Oversight and Government Reform.  After quoting from Reilly’s article, Mish made this observation:

Most know I am not a big believer in conspiracies.  I regularly dismiss them.  However, this one was clear from the beginning and like all massive conspiracies, it is now in the light of day.

David Reilly began the Bloomberg Business Week piece this way:

The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water and peanut butter.  After this week’s congressional hearing into the bailout of American International Group Inc., you have to wonder if those folks are crazy after all.

Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.

That “secretive group” is The Federal Reserve of New York, whose president at the time of the AIG bailout was “Turbo” Tim Geithner.  David Reilly’s disgust at the hearing’s revelations became apparent from the tone of his article:

By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking.  This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.

At least in the Eurozone there is fear that the taxpayers will never submit to enhanced economic austerity measures, which would force the citizenry into an impoverished existence so that their increased tax burden could pay off the debts incurred by irresponsible bankers.  In the United States there is no such concern.  The public is much more compliant.  Whether that will change is anyone’s guess.


 

Return of the POMO Junkies

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Most investors have been lamenting the recent stock market swoon.  The Dow Jones Industrial Average has given up all of the gains earned during 2012.  The economic reports keep getting worse by the day.  Yet, for some people all of this is good news  .   .   .

You might find them scattered along the curbs of Wall Street   . . .  with glazed eyes  . . .  British teeth  . . .  and mysterious lesions on their skin.  They approach Wall Street’s upscale-appearing pedestrians, making such requests as:  “POMO?”   . . .  “Late-day rally?”  . . .   “Animal Spirits?”  These desperate souls are the “POMO junkies”.  Since the Federal Reserve concluded the last phase of quantitative easing in June of 2011, the POMO junkies have been hopeless.  They can’t survive without those POMO auctions, wherein the New York Fed would purchase Treasury securities – worth billions of dollars – on a daily basis.  After the auctions, the Primary Dealers would take the sales proceeds to their proprietary trading desks, where the funds would be leveraged and used to purchase high-beta, Russell 2000 stocks.  You saw the results:  A booming stock market – despite a stalled economy.

Since I first wrote about the POMO junkies last summer, they have resurfaced on a few occasions – only to slink back into the shadows as the rumors of an imminent Quantitative Easing 3 were debunked.

The recent spate of awful economic reports and the resulting stock market nosedive have rekindled hopes that the Federal Reserve will crank-up its printing press once again, for the long-awaited QE 3.  Economist John Hussman discussed this situation on Monday:

At this point, the S&P 500 has achieved a cumulative total return of less than 10% since April 2010. Meanwhile, of course, there remains a great deal of faith in the “Bernanke put,” because even though it’s fairly obvious that QE has done nothing durable for the economy or the financial markets over the last couple of years, a hit of QE might at least be good for a few months of “risk on” delirium.  If the American public can’t get thoughtful economic leadership, at least Wall Street’s speculative junkies can hope for a little taste of Q from Sugar Daddy.

One of the problems with QE here, however, is that it would essentially represent fiscal policy for the benefit of speculators, at taxpayer expense.  To see this, note that the 10-year Treasury yield is now down to less than 1.5%.  One wonders how Bernanke would be able to argue, with a straight face, that this is not low enough.  Nevertheless, a 10-year bond has a duration of 8 years – meaning that each 100 basis point fluctuation in interest rates is associated with a change of about 8% in the price of the bond.  So if you buy the bond and hold it for a full year, an interest rate change of of 1.5/8 = .1875, or less than 20 basis points, is enough to wipe out the annual interest and leave you with a negative total return.

*   *   *

“QE3 – subsidizing banks and bond speculators at taxpayer expense” – there’s a pithy slogan.  That doesn’t mean the Fed will refrain from more of its recklessness (which will be nearly impossible to reverse when it becomes necessary to do so), but does anyone actually believe by now that QE would improve the economy, durably elevate risky assets beyond a few months, or materially relieve global debt strains?

Obviously, the POMO junkies have no such concerns.  Beyond that, the Federal Reserve’s “third mandate” – keeping the stock market bubble inflated – will be the primary factor motivating the decision, regardless of whether those asset prices hold for more than a few months.

The POMO junkies are finally going to score.  As they do, a tragic number of retail investors will be led to believe that the stock market has “recovered”, only to learn – a few months down the road – that the latest bubble has popped.


 

More Favorable Reviews For Huntsman

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In my last posting, I focused on how Jon Huntsman has been the only Presidential candidate to present responsible ideas for regulating the financial industry (Obama included).  Since that time, I have read a number of similarly favorable reactions from respected authorities and commentators who reviewed Huntsman’s proposals .

Simon Johnson is the former Chief Economist for the International Monetary Fund (IMF) from 2007-2008.  He is currently the Ronald A. Kurtz Professor of Entrepreneurship at the MIT Sloan School of Management.  At his Baseline Scenario blog, Professor Johnson posted the following comments in reaction to Jon Huntsman’s policy page on financial reform and Huntsman’s October 19 opinion piece for The Wall Street Journal:

More bailouts and the reinforcement of moral hazard – protecting bankers and other creditors against the downside of their mistakes – is the last thing that the world’s financial system needs.   Yet this is also the main idea of the Obama administration.  Treasury Secretary Tim Geithner told the Fiscal Times this week that European leaders “are going to have to move more quickly to put in place a strong firewall to help protect countries that are undertaking reforms,” meaning more bailouts.  And this week we learned more about the underhand and undemocratic ways in which the Federal Reserve saved big banks last time around.  (You should read Ron Suskind’s book, Confidence Men: Wall Street, Washington, and the Education of a President, to understand Mr. Geithner’s philosophy of unconditional bailouts; remember that he was president of the New York Fed before become treasury secretary.)

Is there really no alternative to pouring good money after bad?

In a policy statement released this week, Governor Jon Huntsman articulates a coherent alternative approach to the financial sector, which begins with a diagnosis of our current problem:  Too Big To Fail banks,

“To protect taxpayers from future bailouts and stabilize America’s economic foundation, Jon Huntsman will end too-big-to-fail. Today we can already begin to see the outlines of the next financial crisis and bailouts. More than three years after the crisis and the accompanying bailouts, the six largest U.S. financial institutions are significantly bigger than they were before the crisis, having been encouraged by regulators to snap up Bear Stearns and other competitors at bargain prices”

Mr. Geithner feared the collapse of big banks in 2008-09 – but his policies have made them bigger.  This makes no sense.  Every opportunity should be taken to make the megabanks smaller and there are plenty of tools available, including hard size caps and a punitive tax on excessive size and leverage (with any proceeds from this tax being used to reduce the tax burden on the nonfinancial sector, which will otherwise be crushed by the big banks’ continued dangerous behavior).

The goal is simple, as Mr. Huntsman said in his recent Wall Street Journal opinion piece: make the banks small enough and simple enough to fail, “Hedge funds and private equity funds go out of business all the time when they make big mistakes, to the notice of few, because they are not too big to fail.  There is no reason why banks cannot live with the same reality.”

The quoted passage from Huntsman’s Wall Street Journal essay went on to say this:

These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s.  There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose.

The major banks’ too-big-to-fail status gives them a comparative advantage in borrowing over their competitors thanks to the federal bailout backstop.

Far be it from President Obama to make such an observation.

Huntsman’s policy page on financial reform included a discussion of repealing the Dodd-Frank law:

More specifically, real reform means repealing the 2010 Dodd-Frank law, which perpetuates too-big-to-fail and imposes costly and mostly useless regulations on innocent smaller banks without addressing the root causes of the crisis or anticipating future crises.  But the overregulation cannot be addressed without ending the bailout subsidies, so that is where reform must begin.

Beyond that, Huntsman’s Wall Street Journal piece gave us a chance to watch the candidate step in shit:

Once too-big-to-fail is fixed, we could then more easily repeal the law’s unguided regulatory missiles, such as the Consumer Financial Protection Bureau.  American banks provide advice and access to capital to the entrepreneurs and small business owners who have always been our economic center of gravity.  We need a banking sector that is able to serve that critical role again.

American banks also do a lot to screw their “personal banking” customers (the “little people”) and sleazy “payday loan”-type operations earn windfall profits exploiting those workers whose incomes aren’t enough for them to make it from paycheck-to-paycheck.  The American economy is 70 percent consumer-driven.  American consumers have always been “our economic center of gravity” and the CFPB was designed to protect them.  Huntsman would do well to jettison his anti-CFPB agenda if he wants to become President.

Mike Konczal of the Roosevelt Institute, exhibited a similarly “hot and cold” reaction to Huntsman’s proposals for financial reform.  What follows is a passage from a recent posting at his Rortybomb blog, entitled “Huntsman Wants to Repeal Dodd-Frank so he can Pass Title VII of Dodd-Frank”:

So we need to get serious about derivatives regulation by bringing transparency to the over-the-counter derivatives market, with serious collateral requirements.  This was turned into law as the Wall Street Transparency and Accountability Act of 2010, or Title VII of Dodd-Frank.

So we need to eliminate Dodd-Frank in order to pass Dodd-Frank’s resolution authority and derivative regulations – two of the biggest parts of the bill – but call it something else.

You can argue that Dodd-Frank’s derivative rules have too many loopholes with too much of the market exempted from the process and too much power staying with the largest banks.  But those are arguments that Dodd-Frank doesn’t go far enough, where Huntsman’s critique of Dodd-Frank is that it goes way too far.

Huntsman should be required to explain the issues here – is he against Dodd-Frank before being for it?  Is his Too Big To Fail policy and derivatives policy the same as Dodd-Frank, and if not how do they differ?  It isn’t clear from the materials he has provided so far how the policies would be different, and if it is a problem with the regulations in practice how he would get stronger ones through Congress.

I do applaud this from Huntsman:

RESTORING RULE OF LAW

President Huntsman’s administration will direct the Department of Justice to take the lead in investigating and brokering an agreement to resolve the widespread legal abuses such as the robo-signing scandal that unfolded in the aftermath of the housing bubble.  This is a basic question of rule of law; in this country no one is above the law. There are also serious issues involving potential violations of the securities laws, particularly with regard to fair and accurate disclosure of the underlying loan contracts and property titles in mortgage-backed securities that were sold.  If investors’ rights were abused, this needs to be addressed fully.  We need a comprehensive settlement that puts all these issues behind us, but any such settlement must include full redress of all legal violations.

*   *   *

And I will note that the dog-whistles hidden inside the proposal are towards strong reforms (things like derivatives reform “will also allow end-users to negotiate better terms with Wall Street and in turn lower trading costs” – implicitly arguing that the dealer banks have too much market power and it is the role of the government to create a fair playing field).  Someone knows what they are doing.  His part on bringing down the GSEs doesn’t mention the hobbyhorse of the Right that the CRA and the GSEs caused the crisis, which is refreshing to see.

If Republican voters are smart, they will vote for Jon Huntsman in their state primary elections.  As I said last time:  If Jon Huntsman wins the Republican nomination, there will be a serious possibility that the Democrats could lose control of the White House.


 

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Trouble Ahead

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Forget about what you’ve been told by the “rose-colored glasses” crowd.  We are headed for more economic trouble.  On September 17, economist Lakshman Achuthan gave his prognosis for the economy to Guy Raz, of NPR’s All Things Considered:

Achuthan, co-founder and chief operations officer of the Economic Cycle Research Institute, says all of his economic indicators point to more sputtering ahead.

“The risk of a new recession is quite high,” he says.

In Toronto, Michael Babad of The Globe And Mail saw fit to focus on the latest forecast from “Dr. Doom”:

Nouriel Roubini, the New York University professor who forecast the financial crisis, went further today, warning that “we are entering a recession.”   The question isn’t whether there will be a double-dip, he said on Twitter, but rather how deep it will be.

And the answer, added the chairman and co-founder of Roubini Global Economics, depends on the response of policy makers and developments in the euro zone’s ongoing crisis.

As Gretchen Morgenson reported for The New York Times, the European sovereign debt crisis is already beginning to “wash up on American shores”.  The steep exposure of European banks to the sovereign debt of eurozone countries has become a problem for the United States:

Some of these banks are growing desperate for dollars.  Fearing the worst, investors are pulling back, refusing to roll over the banks’ commercial paper, those short-term i.o.u.’s that are the lifeblood of commerce.  Others are refusing to renew certificates of deposit. European banks need this money, in dollars, to extend loans to American companies and to pay their own debts.

Worries over the banks’ exposure to shaky European government debt have unsettled markets over there – shares of big French banks have taken a beating – but it is unclear how much this mess will hurt the economy back here.  American stock markets, at least, seem a bit blasé about it all:  the Standard & Poor’s 500-stock index rose 5.3 percent last week.

Last Thursday, I expressed my suspicion that the recent stock market exuberance was based on widespread expectation of another round of quantitative easing.  This next round is being referred to as “QE3”.   QE3 is good news for Wall Street because of those POMO auctions, wherein the New York Fed purchases Treasury securities – worth billions of dollars – on a daily basis.  After the auctions, the Primary Dealers take the sales proceeds to their proprietary trading desks, where the funds are leveraged and used to purchase high-beta, Russell 2000 stocks.  You saw the results during QE2:  A booming stock market – despite a stalled economy.

I believe that the European debt situation will become the controlling factor, which will turn the tide in favor of QE3 at the September 20-21 Federal Open Market Committee meeting.

Most pundits have expressed doubts that the Fed would undertake another round of quantitative easing.  Bill McBride of Calculated Risk put it this way:

QE3 is unlikely at the September meeting, but not impossible – however most observers think the FOMC will announce a program to change the composition of their balance sheet (extend maturities).  It is also possible that the FOMC will announce a reduction in the interest rate paid on excess reserves (currently 0.25%).

Tim Duy expressed a more skeptical outlook at his Fed Watch website:

Even more unlikely is another round of quantitative easing.  I don’t think there is much appetite at the Fed for additional asset purchases given the inflation numbers and the stability of longer-term inflation expectations relative to the events that prompted last fall’s QE2.

On the other hand, hedge fund manager Bill Fleckenstein presents a more persuasive case that the Fed can be expected to react to the “massive red ink in world equity markets” (due to floundering European bank stocks) by resorting to its favorite panacea – money printing:

So, to sum up my expectations, I believe that not only will we get a bold new round of QE from the Fed this week, but other central banks will join the party.  (The Bank of Japan and Swiss National Bank are already printing money in an attempt to weaken their currencies.)  If that happens, I believe that assets (stocks, bonds and commodities) will rally rather dramatically, at least for a while, with the length and size of the rally depending on the individual idea/asset.

If no QE is announced, and we basically see nothing done, it will probably be safe to short stocks for investors who can handle that strategy.  Markets would be pummeled until the central planners (i.e., these bankers) are forced to react to the carnage. Such is the nature of the paper-money-central-bank-moral-hazard standard that is currently in place.

The Fed will announce its decision at 2:15 on Wednesday, September 21.  Even if the FOMC proceeds with QE3, its beneficial effects will (again) be limited to the stock market.  The real American economy will continue to stagnate through its “lost decade”, which began in 2007.


 

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Occupy Wall Street – For Some Reason

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Back in July, the Canadian-based, activist network known as Adbusters, announced plans to organize an occupation of Wall Street on September 17, 2011.  Their July 13 announcement revealed that the ultimate goal of the occupation was deliberately left open:

On September 17, we want to see 20,000 people flood into lower Manhattan, set up tents, kitchens, peaceful barricades and occupy Wall Street for a few months.  Once there, we shall incessantly repeat one simple demand in a plurality of voices.

Tahrir succeeded in large part because the people of Egypt made a straightforward ultimatum – that Mubarak must go – over and over again until they won.  Following this model, what is our equally uncomplicated demand?

The most exciting candidate that we’ve heard so far is one that gets at the core of why the American political establishment is currently unworthy of being called a democracy:  we demand that Barack Obama ordain a Presidential Commission tasked with ending the influence money has over our representatives in Washington.  It’s time for DEMOCRACY NOT CORPORATOCRACY, we’re doomed without it.

This demand seems to capture the current national mood because cleaning up corruption in Washington is something all Americans, right and left, yearn for and can stand behind.

A website specifically dedicated to this event was created:  OccupyWallSt.org.  The site has a Mission Statement, proclaiming that on September 17, a tent city will be established in lower Manhattan:

Once there, we shall incessantly repeat one simple demand in a plurality of voices and we will not leave until that demand has been met.

As for that mysterious demand, the website provides a hint as to how it will be determined:

What we demand from our government is for the people to decide through democratic consensus, not this website.  A Facebook poll started by Adbusters suggests the demand might be an end to corporate personhood.

So, will the Facebook poll serve as the vehicle for reaching that “democratic consensus”?

On August 23, Adbusters announced that the Internet hacktivist group, Anonymous had joined #OCCUPYWALLSTREET.  Anonymous prepared this one-minute, promotional video for the cause.  Once Anonymous got on board, the Department of Homeland Security became interested in the event (if it had not done so already).  Computerworld magazine reported that on September 2, a bulletin was issued by the DHS National Cybersecurity and Communications Integration Center (NCCIC):

The DHS alert also warns of three cyber attacks and civil protests it says are planned by Anonymous and affiliated groups.

The first attack, dubbed Occupy Wall Street (OWS) is scheduled for Sept. 17.

The so-called ‘Day of Rage’ protest was first announced by a group called Adbusters in July and is being actively supported by Anonymous.  The organizers of OWS hope to get about 20,000 individuals to gather on Wall Street on that day to protest various U.S. government policies.

It sounds to me as though the Department of Homeland Security is getting revved-up for a mass-rendition to Guantanamo and a busy schedule of “Full Roto-Rooter” cavity searches.  It could get scary.  The camoflauge-attired attendees probably won’t be interested in hearing my explanation that “I’m just here to demand the dismissal of Kathryn Wylde from her post as a Class C Director of the New York Federal Reserve Bank.”

My favorite commentator for MarketWatch, Paul Farrell, predicted that the turnout could be a bit larger than anticipated:

Given today’s intense anger against America’s totally dysfunctional government, no one should be surprised if 90,000 arrive for Occupy Wall Street and its solidarity allies at other financial centers across the world, armed with their rallying cry to stop “the corruption of our governments by Wall Street money.”

After discussing the potential for historic change Occupy Wall Street seems to offer, Farrell posed the simple question:  Will it work?

In the final analysis, this may be a bad case of “too little, too late:”  Back in 1776 our original 57 revolutionaries also “had enough” when they signed the Declaration of Independence. They also risked everything, family, fortunes and lives.  They actually had “one simple demand,” to be free of a tyrannical ruler, George III.

Today, the new ruler is greedy, corrupting democracy.  But it’s locked deep in the American soul.  Maybe they’re asking the wrong question:  Not “Is America Ready for a Tahrir Moment?” Rather ask:  “Is America Past That Moment, Buried Too Deep in a Culture of Greed to Change?”

If so, Wall Street wins, again.  And America loses, again.

The promoters of the Tea Party movement were able to channel the outrage experienced by taxpayers, who watched the Federal Reserve hand trillions over to a small handful of ineptly-managed megabanks.  The Tea Party promoters redirected and exploited that anger as a motivating force, which provoked those citizens to vote against their own interests.  The attempt to tame the beast with regulation (as had been done after the Great Depression) was sabotaged.  Could the Occupy Wall Street effort bring justice back to defeat financial anarchy?  It would be nice if it worked, although I gave up on “hope” in early 2009.


 

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From Disappointing To Creepy

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It was during Barack Obama’s third month in the White House, when I realized he had become the “Disappointer-In-Chief”.  Since that time, the disappointment felt by many of us has progressed into a bad case of the creeps.

Gretchen Morgenson of The New York Times has been widely praised for her recent report, exposing the Obama administration’s vilification of New York State Attorney General Eric Schneiderman for his refusal to play along with Team Obama’s efforts to insulate the fraud-closure banks from the criminal prosecution they deserve.  The administration is attempting to pressure each Attorney General from every state to consent to a settlement of any and all claims against the banksters arising from their fraudulent foreclosure practices.  Each state is being asked to release the banks from criminal and civil liability in return for a share of the $20 billion settlement package.  The $20 billion is to be used for loan modifications.  Leading the charge on behalf of the administration are Shaun Donovan, the Secretary of Housing and Urban Development, as well as a number of high-ranking officials from the Justice Department, led by Attorney General Eric Hold-harmless.  Here are some highlights from Ms. Morgenson’s article:

Mr. Schneiderman and top prosecutors in some other states have objected to the proposed settlement with major banks, saying it would restrict their ability to investigate and prosecute wrongdoing in a variety of areas, including the bundling of loans in mortgage securities.

*   *   *

Mr. Schneiderman has also come under criticism for objecting to a settlement proposed by Bank of New York Mellon and Bank of America that would cover 530 mortgage-backed securities containing Countrywide Financial loans that investors say were mischaracterized when they were sold.

The deal would require Bank of America to pay $8.5 billion to investors holding the securities; the unpaid principal amount of the mortgages remaining in the pools totals $174 billion.

*   *   *

This month, Mr. Schneiderman sued to block that deal, which had been negotiated by Bank of New York Mellon as trustee for the holders of the securities.

The passage from Gretchen Morgenson’s report which drew the most attention concerned a statement made to Schneiderman by Kathryn Wylde.  Ms. Wylde is a “Class C” Director of the Federal Reserve Bank of New York.  The role of a Class C Director is to represent the interests of the public on the New York Fed board.  Barry Ritholtz provided this reaction to Ms. Wylde’s encounter with Mr. Schneiderman:

If the Times report is accurate, and the quote below represents Ms. Wylde’s comments, than that position is a laughable mockery, and Ms. Wylde should resign effective immediately.

The quote in question, which was reported to have occurred at Governor Hugh Carey’s funeral (!?!)  was as follows:

“It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it.  Wall Street is our Main Street — love ’em or hate ’em.  They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.”

I do not know if Ms. Wylde understands what her proper role should be, but clearly she is somewhat confused.  She appears to be far more interested in representing the banks than the public.

Robert Scheer of Truthdig provided us with some background on Obama’s HUD Secretary, Shaun Donovan, one of the administration’s arm-twisters in the settlement effort :

Donovan has good reason not to want an exploration of the origins of the housing meltdown:  He has been a big-time player in the housing racket for decades.  Back in the Clinton administration, when government-supported housing became a fig leaf for bundling suspect mortgages into what turned out to be toxic securities, Donovan was a deputy assistant secretary at HUD and acting Federal Housing Administration commissioner.  He was up to his eyeballs in this business when the Clinton administration pushed through legislation banning any regulation of the market in derivatives based on home mortgages.

Armed with his insider connections, Donovan then went to work for the Prudential conglomerate (no surprise there), working deals with the same government housing agencies that he had helped run.  As The New York Times reported in 2008 after President Barack Obama picked him to be secretary of HUD, “Mr. Donovan was a managing director at Prudential Mortgage Capital Co., in charge of its portfolio of investments in affordable housing loans, including Fannie Mae and the Federal Housing Administration debt.”

Obama has been frequently criticized for stacking his administration with people who regularly shuttle between corporations and the captured agencies responsible for regulating those same businesses.  Risk management guru, Christopher Whalen lamented the consequences of Obama’s cozy relationship with the Wall Street banks – most tragically, those resulting from Obama’s unwillingness to adopt the “Swedish solution” of putting the insolvent zombie banks through temporary receivership:

The path of least resistance politically has been to temporize and talk.  But by following the advice of Rubin and Summers, and avoiding tough decisions about banks and solvency, President Obama has only made the crisis more serious and steadily eroded public confidence.  In political terms, Obama is morphing into Herbert Hoover, as I wrote in one of my first posts for Reuters.com, “In a new period of instability, Obama becomes Hoover.”

Whereas two or three years ago, a public-private approach to restructuring insolvent banks could have turned around the economic picture in relatively short order, today the cost to clean up the mess facing Merkel, Obama and other leaders of western European nations is far higher and the degree of unease among the public is growing.  You may thank Larry Summers, Robert Rubin and the other members of the “do nothing” chorus around President Obama for this unfortunate outcome.

We are now past the point of blaming Obama’s advisors for the President’s recurrent betrayal of the public interest while advancing the goals of his corporate financiers.  Yves Smith of Naked Capitalism has voiced increasingly harsh appraisals of Obama’s performance.  By August 22, it became clear to Ms. Smith that the administration’s efforts to shield the fraud-closure banks from liability exposed a scandalous degree of venality:

It is high time to describe the Obama Administration by its proper name:  corrupt.

Admittedly, corruption among our elites generally and in Washington in particular has become so widespread and blatant as to fall into the “dog bites man” category.  But the nauseating gap between the Administration’s propaganda and the many and varied ways it sells out average Americans on behalf of its favored backers, in this case the too big to fail banks, has become so noisome that it has become impossible to ignore the fetid smell.

*   *   *

Team Obama bears all the hallmarks of being so close to banks and big corporations that it has lost all contact with and understanding of mainstream America.

The latest example is its heavy-handed campaign to convert New York state attorney general Eric Schneiderman to a card carrying member of the “be nice to our lords and masters the banksters” club.  Schneiderman was the first to take issue with the sham of the so-called 50 state attorney general mortgage settlement.  As far as the Administration is concerned, its goal is to give banks a talking point and prove to them that Team Obama is protecting their backs in a way that the chump public hopefully won’t notice.

*   *   *

Yet rather than address real, serious problems, senior administration officials are instead devoting time and effort to orchestrating a faux grass roots campaign to con a state AG into thinking his supporters are deserting him because he has dared challenge the supremacy of the banks.

I would include Eric Schneiderman in a group with Elizabeth Warren and Maria Cantwell as worthy challengers to Barack Obama in the 2012 Presidential Election.  I wish one of them would step forward.


 

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Elizabeth Warren Should Run Against Obama

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Now that President Obama has thrown Elizabeth Warren under the bus by nominating Richard Cordray to head the Consumer Financial Protection Bureau (CFPB), she is free to challenge Obama in the 2012 election.  It’s not a very likely scenario, although it’s one I’d love to see:  Warren as the populist, Independent candidate – challenging Obama, the Wall Street tool – who is already losing to a phantom, unspecified Republican.

A good number of people were disappointed when Obama failed to nominate Warren to chair the CFPB, which was her brainchild.  It was bad enough that Treasury Secretary “Turbo” Tim Geithner didn’t like her – but once the President realized he was getting some serious pushback about Warren from Senate Republicans – that was all it took.  Some Warren supporters have become enamored with the idea that she could challenge Scott Brown for his seat representing Massachusetts in the Senate.  However, many astute commentators consider that as a really stupid idea.  Here is the reaction from Yves Smith of Naked Capitalism:

We argued yesterday that the Senate was not a good vehicle for advancing Elizabeth Warren’s aims of helping middle class families, since she would have no more, and arguably less power than she has now, and would be expected to defend Democrat/Obama policies, many of which are affirmatively destructive to middle class interests (just less so than what the Republicans would put in place).

A poll conducted in late June by Scott Brown and the Republican National Committee raises an even more basic question:  whether she even has a shot at winning.

*   *   *

The poll shows a 25 point gap, which is a massive hurdle, and also indicates that Brown is seen by many voters as not being a Republican stalwart (as in he is perceived to vote for the state’s, not the party’s, interest).  A 25 point gap is a near insurmountable hurdle and shows that Warren’s reputation does not carry as far as the Democratic party hackocracy would like her fans to believe.  But there’s no reason not to get this pesky woman to take up what is likely to be a poisoned chalice.  If she wins, she’s unlikely to get on any important committees, given the Democratic party pay to play system, and will be boxed in by the practical requirements of having to make nice to the party and support Obama positions a meaningful portion of the time. And if she runs and loses, it would be taken as proof that her middle class agenda really doesn’t resonate with voters, which will give the corporocrats free rein (if you can’t sell a liberal agenda in a borderline Communist state like Massachusetts, it won’t play in Peoria either).

Obviously, a 2012 challenge to the Obama Presidency by Warren would be an uphill battle.  Nevertheless, it’s turning out to be an uphill battle for the incumbent, as well.  David Weidner of MarketWatch recently discussed how Obama’s failure to adequately address the economic crisis has placed the President under the same pressure faced by many Americans today:

He’s about to lose his job.

*   *   *

Blame as much of the problem on his predecessor as you like, the fact is Obama hasn’t come up with a solution.  In fact, he’s made things worse by filling his top economic posts with banking-friendly interests, status-quo advisers and milquetoast regulators.

And if there’s one reason Obama loses in 2012, it’ll be because he failed to surround himself with people willing to take drastic action to get the economy moving again.

In effect, Obama’s team has rewarded the banking industry under the guise of “saving the economy” while abandoning citizens and consumers desperate for jobs, credit and spending power.

There was the New York Fed banker cozy with Wall Street: Timothy Geithner.

There was the former Clinton administration official who was the architect of policies that led to the financial crisis: Larry Summers.

There was a career bureaucrat named to lead the Securities and Exchange Commission:  Mary Schapiro.

To see just how unremarkable this group is, consider that the most progressive regulator in the Obama administration, Federal Deposit Insurance Corp. Chairman Sheila Bair, was a Republican appointed by Bush.

*   *   *

The lack of action by Obama’s administration of mediocrities is the reason the recovery sputters.  In essence, the turnaround depends too much on a private sector that, having escaped failure, is too content to sit out what’s supposed to be a recovery.

*   *   *

What began as a two-step approach:  1) saving the banks, and then 2) saving homeowners, was cut short after the first step.

Instead of extracting more lending commitments from the banks, forcing more haircuts on investors and more demands on business, Obama has let his team of mediocrities allow the debate to be turned on government.  The government caused the financial crisis.  The government ruined the housing market.

It wasn’t true at the start, but it’s becoming true now.

Despite his status as the incumbent and his $1 billion campaign war chest, President Obama could find himself voted out of office in 2012.  When you consider the fact that the Republican Party candidates who are currently generating the most excitement are women (Bachmann and the undeclared Palin) just imagine how many voters might gravitate to a populist female candidate with substantially more brains than Obama.

The disillusionment factor afflicting Obama is not something which can be easily overlooked.  The man I have referred to as the “Disappointer-In-Chief” since his third month in office has lost more than the enthusiasm of his “base” supporters – he has lost the false “progressive” image he had been able to portray.  Matt Stoller of the Roosevelt Institute explained how the real Obama had always been visible to those willing to look beyond the campaign slogans:

Many people are “disappointed” with Obama.  But, while it is certainly true that Obama has broken many many promises, he projected his goals in his book The Audacity of Hope.  In Audacity, he discussed how in 2002 he was going to give politics one more shot with a Senate campaign, and if that didn’t work, he was going into corporate law and getting wealthy like the rest of his peer group.  He wrote about how passionate activists were too simple-minded, that the system basically worked, and that compromise was a virtue in and of itself in a world of uncertainty. His book was a book about a fundamentally conservative political creature obsessed with process, not someone grounded in the problems of ordinary people.  He told us what his leadership style is, what his agenda was, and he’s executing it now.

I expressed skepticism towards Obama from 2005, onward.  Paul Krugman, Debra Cooper, and Tom Ferguson among others pegged Obama correctly from day one.  Obama broadcast who he was, through his conservative policy focus (which is how Krugman pegged him), his bank backers (which is how Ferguson pegged him), his political support of Lieberman (which is how I pegged him), and his cavalier treatment of women’s issues (which is how Debra Cooper pegged him).  He is doing so again, with his choice to effectively remove Elizabeth Warren from the administration.

I just wish Elizabeth Warren would fight back and challenge Obama for The White House.  If only   .   .   .


 

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Federal Reserve Bailout Records Provoke Limited Outrage

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On December 3, 2009 I wrote a piece entitled, “The Legacy of Mark Pittman”.  Mark Pittman was the reporter at Bloomberg News whose work was responsible for the lawsuit, brought under the Freedom of Information Act, against the Federal Reserve, seeking disclosure of the identities of those financial firms benefiting from the Fed’s eleven emergency lending programs.

The suit, Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, (U.S. District Court, Southern District of New York) resulted in a ruling in August of 2009 by Judge Loretta Preska, who rejected the Fed’s defense that disclosure would adversely affect the ability of those institutions (which sought loans at the Fed’s discount window) to compete for business.  The suit also sought disclosure of the amounts loaned to those institutions as well as the assets put up as collateral under the Fed’s eleven lending programs, created in response to the financial crisis.  The Federal Reserve appealed Judge Preska’s decision, taking the matter before the United States Court of Appeals for the Second Circuit.  The Fed’s appeal was based on Exemption 4 of the Freedom of Information Act, which exempts trade secrets and confidential business information from mandatory disclosure.  The Second Circuit affirmed Judge Preska’s decision on the basis that the records sought were neither trade secrets nor confidential business information because Bloomberg requested only records generated by the Fed concerning loans that were actually made, rather than applications or confidential information provided by persons, firms or other organizations in attempt to obtain loans.  Although the Fed did not attempt to appeal the Second Circuit’s decision to the United States Supreme Court, a petition was filed with the Supreme Court by Clearing House Association LLC, a coalition of banks that received bailout funds.  The petition was denied by the Supreme Court on March 21.

Bob Ivry of Bloomberg News had this to say about the documents produced by the Fed as a result of the suit:

The 29,000 pages of documents, which the Fed released in pdf format on a CD-ROM, revealed that foreign banks accounted for at least 70 percent of the Fed’s lending at its October, 2008 peak of $110.7 billion.  Arab Banking Corp., a lender part- owned by the Central Bank of Libya, used a New York branch to get 73 loans from the window in the 18 months after Lehman Brothers Holdings Inc. collapsed.

As government officials and news reporters continue to review the documents, a restrained degree of outrage is developing.  Ron Paul is the Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy.  He is also a longtime adversary of the Federal Reserve, and author of the book, End The Fed.  A recent report by Peter Barnes of FoxBusiness.com said this about Congressman Paul:

.   .   .   he plans to hold hearings in May on disclosures that the Fed made billions — perhaps trillions — in secret emergency loans to almost every major bank in the U.S. and overseas during the financial crisis.

*   *   *

“I am, even with all my cynicism, still shocked at the amount this is and of course shocked, but not completely surprised, [that] much [of] this money went to help foreign banks,” said Rep. Ron Paul (R-TX),   .   .   .  “I don’t have [any] plan [for] legislation …  It will take awhile to dissect that out, to find out exactly who benefitted and why.”

In light of the fact that Congressman Paul is considering another run for the Presidency, we can expect some exciting hearings starring Ben Bernanke.

Senator Bernie Sanders of Vermont became an unlikely ally of Ron Paul in their battle to include an “Audit the Fed” provision in the financial reform bill.  Senator Sanders was among the many Americans who were stunned to learn that Arab Banking Corporation used a New York branch to get 73 loans from the Fed during the 18 months after the collapse of Lehman Brothers.  The infuriating factoid in this scenario is apparent in the following passage from the Bloomberg report by Bob Ivry and Donal Griffin:

The bank, then 29 percent-owned by the Libyan state, had aggregate borrowings in that period of $35 billion — while the largest single loan amount outstanding was $1.2 billion in July 2009, according to Fed data released yesterday.  In October 2008, when lending to financial institutions by the central bank’s so- called discount window peaked at $111 billion, Arab Banking took repeated loans totaling more than $2 billion.

Ivry and Griffin provided this reaction from Bernie Sanders:

“It is incomprehensible to me that while creditworthy small businesses in Vermont and throughout the country could not receive affordable loans, the Federal Reserve was providing tens of billions of dollars in credit to a bank that is substantially owned by the Central Bank of Libya,” Senator Bernard Sanders of Vermont, an independent who caucuses with Democrats, wrote in a letter to Fed and U.S. officials.

The best critique of the Fed’s bailout antics came from Rolling Stone’s Matt Taibbi.  He began his report this way:

After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds.  And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the “official” budget in size – a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.

As Matt Taibbi began discussing what the documents produced by the Fed revealed, he shared this reaction from a staffer, tasked to review the records for Senator Sanders:

“Our jaws are literally dropping as we’re reading this,” says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont.  “Every one of these transactions is outrageous.”

In case you are wondering just how “outrageous” these transactions were, Mr. Taibbi provided an outrageously entertaining chronicle of a venture named “Waterfall TALF Opportunity”, whose principal investors were Christy Mack and Susan Karches.  Susan Karches is the widow of Peter Karches, former president of Morgan Stanley’s investment banking operations.  Christy Mack is the wife of John Mack, the chairman of Morgan Stanley.  Matt Taibbi described Christy Mack as “thin, blond and rich – a sort of still-awake Sunny von Bulow with hobbies”.  Here is how he described Waterfall TALF:

The technical name of the program that Mack and Karches took advantage of is TALF, short for Term Asset-Backed Securities Loan Facility.  But the federal aid they received actually falls under a broader category of bailout initiatives, designed and perfected by Federal Reserve chief Ben Bernanke and Treasury Secretary Timothy Geithner, called “giving already stinking rich people gobs of money for no fucking reason at all.”  If you want to learn how the shadow budget works, follow along.  This is what welfare for the rich looks like.

The venture would have been more aptly-named, “TALF Exploitation Windfall Opportunity”.  Think about it:  the Mack-Karches entity was contrived for the specific purpose of cashing-in on a bailout program, which was ostensibly created for the purpose of preventing a consumer credit freeze.

I was anticipating that the documents withheld by the Federal Reserve were being suppressed because – if the public ever saw them – they would provoke an uncontrollable degree of public outrage.  So far, the amount of attention these revelations have received from the mainstream media has been surprisingly minimal.  When one compares the massive amounts squandered by the Fed on Crony Corporate Welfare Queens such as Christy Mack and Susan Karches ($220 million loaned at a fraction of a percentage point) along with the multibillion-dollar giveaways (e.g. $13 billion to Goldman Sachs by way of Maiden Lane III) the fighting over items in the 2012 budget seems trivial.

The Fed’s defense of its lending to foreign banks was explained on the New York Fed’s spiffy new Liberty Street blog:

Discount window lending to U.S. branches of foreign banks and dollar funding by branches to parent banks helped to mitigate the economic impact of the crisis in the United States and abroad by containing financial market disruptions, supporting loan availability for companies, and maintaining foreign investment flows into U.S. companies and assets.

Without the backstop liquidity provided by the discount window, foreign banks that faced large and fluctuating demand for dollar funding would have further driven up the level and volatility of money market interest rates, including the critical federal funds rate, the Eurodollar rate, and Libor (the London interbank offered rate).  Higher rates and volatility would have increased distress for U.S. financial firms and U.S. businesses that depend on money market funding.  These pressures would have been reflected in higher interest rates and reduced bank lending, bank credit lines, and commercial paper in the United States.  Moreover, further volatility in dollar funding markets could have disrupted the Federal Reserve’s ability to implement monetary policy, which requires stabilizing the federal funds rate at the policy target set by the Federal Open Market Committee.

In other words:  Failure by the Fed to provide loans to foreign banks would have made quantitative easing impossible.  There would have been no POMO auctions.  As a result, there would have been no supply of freshly printed-up money to be used by the proprietary trading desks of the primary dealers to ramp-up the stock market for those “late-day rallies”.  This process was described as the “POMO effect” in a 2009 paper by Precision Capital Management entitled, “A Grand Unified Theory of Market Manipulation”.

Thanks for the explanation, Mr. Dudley.


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Revenge Of The Blondes

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My vintage iPhone sputtered, stammered and finally stalled out as I tried to access an article about derivatives trading after clicking on the link.  The process got as far as the appearance of the URL, which indicated that the source was The New York Times.  I assumed that the piece had been written by Gretchen Morgenson and that I could read it once I sat down at my regular computer.  Within moments, I was at The Big Picture website, where I found another link to the same article.  This time it worked and I found that the piece had been written by Louise Story.  “Wrong blonde”, I thought to myself.  It was at that point when I realized how much the world had changed from the days when “dumb blonde” jokes had been so popular.  In fact, a vast amount of the skullduggery that caused and resulted from the financial crisis has been exposed and explained by women with blonde hair.  After a handful of unscrupulous Wall Street bankers brought the world’s financial system to the brink of collapse, an even smaller number of blonde, female sleuths set about unwinding this complex web of deceit for “the Average Joe” to understand.  Here are a few of them:

Yves Smith

All right  .  .  .   It’s an old picture from her days at Goldman Sachs.  Cue-up Duran Duran.  (It’s almost as old as the photo of Ben Bernanke in my fake Chandon ad, based on their  “Life needs bubbles” theme.)  On most days, the first blog I access is Naked Capitalism.  Its publisher and most frequent contributor is Yves Smith (a/k/a Susan Webber).  At the Seeking Alpha website, a review of her recent book, ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, began this way:

ECONNED is the most deeply researched and empirically validated account of the financial meltdown of 2008-2009 and how its unaddressed causes predict similar crises to come.  As a long-time Wall Street veteran, Yves Smith, through her influential blog “Naked Capitalism” lucidly explains to her over 2500,000 unique visitors each month exactly what games market players use and how their “innovations” evolved over the years to take the rest of us to the cleaners.  Smith is that unusual combination of scholar, expert, participant and teacher, who writes with a clarifying sense of moral outrage and disgust at the decline of ethics on Wall Street and financial markets.

Smith’s daily list of Links at Naked Capitalism, covers a broad range of newsworthy subjects both within and beyond the financial realm.  I usually find myself reading all of the articles linked on that page.

Gretchen Morgenson

Gretchen Morgenson is my favorite reporter for The New York Times.  She has proven herself to be Treasury Secretary Turbo Tim Geithner’s worst nightmare.  Ms. Morgenson has caused Geithner so much agony, I would not be surprised to hear that he named his recent kidney stone after her.  With Jo Becker, Ms. Morgenson wrote the most revealing essay on Geithner back in April of 2009.  Once you’ve read it, you will have a better understanding of why Geithner gave away so many billions to the banksters as president of the New York Fed by way of Maiden Lane III.  Morgenson subsequently wrote her own article on Maiden Lane III here.

Ms. Morgenson has many detractors.  Most prominent among them was the late Tanta (a/k/a Doris Dungey) of the Calculated Risk blog, who wrote the recurring “Morgenson Watch” for that site.  Yves Smith of Naked Capitalism (see above) accurately summed up the bulk of the criticism directed against Gretchen Morgenson:

Gretchen Morgenson is often a target of heated criticism on the blogosphere, which I have argued more than once is overdone.  While her articles on executive compensation and securities litigation are consistently well reported, she has an appetite for the wilder side of finance, and often looks a bit out of her depth.  Typically, she simply runs afoul of finance pedants, who jump on misapplication of industry jargon or minor errors when those (admittedly disconcerting) errors fail to derail the thrust of the argument.

A noted example of this was Morgenson’s article of March 6 2010, in which she explained that Greece was hiding its financial obligations with “credit default swaps” rather than currency swaps.  The bloggers who vigilantly watch for her to make such a mistake wouldn’t let go of that one for quite a while.  Nevertheless, I like her work.  Nobody is perfect.

Louise Story

As I mentioned at the outset of this piece, Louise Story wrote the recent article for The New York Times, concerning anticompetitive practices in the credit derivatives clearing, trading and information services industries.  Discussing that subject in a manner that can make it understandable to the “average reader” (someone with a high school education) is no easy task.  Beyond that, Ms. Story was able to explain the frustrations of regulators, who had hoped that some degree of transparency could be introduced to the derivatives market as a result of the recently enacted, “Dodd-Frank” financial reform bill.  It’s an important article, which has drawn a good deal of well-deserved attention.

Last year, Ms. Story co-authored a New York Times article with Gretchen Morgenson, concerning collateralized debt obligations (CDOs) entitled, “Banks Bundled Bad Debt, Bet Against It and Won”.  As I pointed out at the time:  Pay close attention to the explanation of how Tim Geithner retained a “special counselor” whose previous responsibilities included oversight of the parent company of an investment firm named Tricadia, Inc.  Tricadia has the dubious honor of having helped cause the financial crisis by creating CDOs and then betting against them.

These three women, as well as a number of their non-blonde counterparts (including:  Nomi Prins, Janet Tavakoli and Naomi Klein) have exposed a vast amount of the odious activities that caused the financial crisis.  They have helped inform and educate the public on what the “good old boys” network of bankers, regulators and lobbyists have been doing to this country.  The paradigm shift that took us beyond the sexist stereotype of the  “dumb blonde” has brought our society to the point where women – often blonde ones – have intervened to alert the rest of us to the hazards caused by what Paul Farrell of MarketWatch described as “Wall Street’s macho ego trip”.

If you should come across someone who still tells “dumb blonde” jokes – ask that person if he (or she) has read ECONned.


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