Since that time absolutely nothing has changed. In fact, the SEC has allowed the stock market to become an even more dangerous place for “retail investors” (mom and pop) to keep their life savings.
The use of “limit orders” has become a joke. The only reason for using a limit order is to let your enemies (the predatory traders) know the maximum extent to which you will allow yourself to be screwed on a trade. Since July of 2009, I have discussed the threat posed to retail investors by the use of High-Frequency Trading (HFT) systems. Computers – programmed with predatory algorithms – can engage in “computerized front-running” through the use of “flash orders” to force your own limit order to be executed at its most extreme expense to you. I discussed this situation in more detail on May 18, 2010.
I rarely use “stop loss” orders. They are used by investors to limit their loss if a stock price sinks. The investor specifies a stop price (based on a percentage of the purchase price which is the maximum amount the investor is willing to lose on the stock). If the stock eventually drops to the price in the stop order, the transaction is initiated and the order goes out to the exchange as a market order – to be filled at the best available price at the time. In other words, there is no guarantee that the order will be filled at the price specified in the stop order. In the “flash crash” on May 6 of 2010, many investors lost their shirts because their stop orders were executed and by the time the investors tried to repurchase the stocks, the prices rebounded to where they were before the flash crash. Worse yet, by the time their stop orders were actually filled, the stock prices had dropped tremendously. Not only did those investors lose money on the stop orders for no good reason – but many chose to buy back their stocks at the pre-crash prices. As a result, they lost twice as much money just because of an emotional attachment to the stock. (Emotional attachment to a particular stock is a bad investment habit.) Since that time, a number of “mini flash crashes” have been engineered by predatory traders on particular stocks, forcing investors off their positions to take losses, which ultimately benefit the predators, who use stealthy tactics to reap those profits without being caught.
Stock exchanges have explicit rules for canceling “clearly erroneous trades” and for triggering so-called circuit breakers that halt trading. None of the trades mentioned in this story met that criteria.
Generally, trades can be canceled if they fall 5% to 10% from the last trade, but the rules vary, depending on the market cap of a company and its trading volume.
Investors still have to notify the exchange within 30 minutes if they want their trade to be canceled.
And because many of the wild swings aren’t extreme enough to be considered “clearly erroneous,” individual investors may not even be aware that certain trades are being executed.
Although the article noted that “(t)he SEC continues to make changes to try to combat the frequency and impact of the mini flash crashes”, there is apparently nothing being done by the SEC to prevent the predatory engineering of those crashes. The SEC is apparently doing nothing to allow investors to unwind trades triggered by those crashes. More important, the SEC is doing nothing to track down and prosecute the culprits responsible for engineering and profiteering from these events.
Much has changed since the inception of the Occupy Wall Street movement. When the occupation of Zuccotti Park began on September 17, the initial response from mainstream news outlets was to simply ignore it – with no mention of the event whatsoever. When that didn’t work, the next tactic involved using the “giggle factor” to characterize the protesters as “hippies” or twenty-something “hippie wanna-bes”, attempting to mimic the protests in which their parents participated during the late-1960s. When that mischaracterization failed to get any traction, the presstitutes’ condemnation of the occupation events – which had expanded from nationwide to worldwide – became more desperate: The participants were called everything from “socialists” to “anti-Semites”. Obviously, some of this prattle continues to emanate from unimaginative bloviators. Nevertheless, it didn’t take long for respectable news sources to give serious consideration to the OWS effort.
One month after the occupation of Zuccotti Park began, The Economist explained why the movement had so much appeal to a broad spectrum of the population:
So the big banks’ apologies for their role in messing up the world economy have been grudging and late, and Joe Taxpayer has yet to hear a heartfelt “thank you” for bailing them out. Summoned before Congress, Wall Street bosses have made lawyerised statements that make them sound arrogant, greedy and unrepentant. A grand gesture or two – such as slashing bonuses or giving away a tonne of money – might have gone some way towards restoring public faith in the industry. But we will never know because it didn’t happen.
Reports eventually began to surface, revealing that many “Wall Street insiders” actually supported the occupiers. Writing for the DealBook blog at The New York Times, Jesse Eisinger provided us with the laments of a few Wall Street insiders, whose attitudes have been aligned with those of the OWS movement.
By late December, it became obvious that the counter-insurgency effort had expanded. At The eXiledblog, Yasha Levine discussed the targeting of journalists by police, hell-bent on squelching coverage of the Occupy movement. In January, New York Mayor Michael Bloomberg lashed out against the OWS protesters by parroting what has become The Big Lie of our time. In response to a question about Occupy Wall Street, Mayor Bloomberg said this:
“It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”
Since then, both Bloomberg.com and Reuters each have picked up the Big Lie theme. (Columbia Journalism Review as well). In today’s NYT, Joe Nocera does too, once again calling out those who are pushing the false narrative for political or ideological reasons in a column simply called “The Big Lie“.
Once the new year began, the Occupy Oakland situation quickly deteriorated. Chris Hedges of Truthdig took a hard look at the faction responsible for the “feral” behavior, raising the question of whether provocateurs could have been inciting the ugly antics:
The presence of Black Bloc anarchists – so named because they dress in black, obscure their faces, move as a unified mass, seek physical confrontations with police and destroy property – is a gift from heaven to the security and surveillance state.
Chris Hedges gave further consideration to the involvement of provocateurs in the Black Bloc faction on February 13:
Occupy’s most powerful asset is that it articulates this truth. And this truth is understood by the mainstream, the 99 percent. If the movement is severed from the mainstream, which I expect is the primary goal of the Department of Homeland Security and the FBI, it will be crippled and easily contained. Other, more militant groups may rise and even flourish, but if the Occupy movement is to retain the majority it will have to fight within self-imposed limitations of nonviolence.
Despite the negative publicity generated by the puerile pranks of the Black Bloc, the Occupy movement turned a corner on February 13, when Occupy the SEC released its 325-page comment letter concerning the Securities and Exchange Commission’s draft “Volcker Rule”. (The Volcker Rule contains the provisions in the Dodd-Frank financial reform act which restrict the ability of banks to make risky bets with their own money). Occupy the SEC took advantage of the “open comment period” which is notoriously exploited by lobbyists and industry groups whenever an administrative agency introduces a new rule. The K Street payola artists usually see this as their last chance to “un-write” regulations.
Occupy the SEC is the wonky finreg arm of Occupy Wall Street, and its main authors are worth naming and celebrating: Akshat Tewary, Alexis Goldstein, Corley Miller, George Bailey, Caitlin Kline, Elizabeth Friedrich, and Eric Taylor. If you can’t read the whole thing, at least read the introductory comments, on pages 3-6, both for their substance and for the panache of their delivery. A taster:
During the legislative process, the Volcker Rule was woefully enfeebled by the addition of numerous loopholes and exceptions. The banking lobby exerted inordinate influence on Congress and succeeded in diluting the statute, despite the catastrophic failures that bank policies have produced and continue to produce…
The Proposed Rule also evinces a remarkable solicitude for the interests of banking corporations over those of investors, consumers, taxpayers and other human beings.
* * *
There’s lots more where that comes from, including the indelible vision of how “the Volcker Rule simply removes the government’s all-too-visible hand from underneath the pampered haunches of banking conglomerates”. But the real substance is in the following hundreds of pages, where the authors go through the Volcker Rule line by line, explaining where it’s useless and where it can and should be improved.
John Knefel of Salon emphasized how this comment letter exploded the myth that the Occupy movement is simply a group of cynical hippies:
The working group’s detailed policy position gives lie to the common claim that the Occupy Wall Street movement is “well intentioned but misinformed.” It shows there’s room in the movement both for policy wonks and those chanting “anti-capitalista.”
Even Mayor Bloomberg’s BusinessWeek spoke highly of Occupy the SEC’s efforts. Karen Weise interviewed Occupy’s Alexis Goldstein, who had previously worked at such Wall Street institutions as Deutsche Bank, where she built IT systems for traders:
Like Goldstein, several members have experience in finance. Kline says she used to be a derivatives trader. Tewary is a lawyer who worked on securitization cases at the firm Kaye Scholer, according to his bio on the website of his current firm, Kamlesh Tewary. Mother Jones, which reported on the group in December, says O’Neil is a former Wall Street quant.
There are parts of the rule that Occupy the SEC would like to see toughened. For example, Goldstein sees a “big loophole” in the proposed rule that allows banks to make proprietary trades using so-called repurchase agreements, by which one party sells securities to another with the promise to buy back the securities later. The group wants to make sure other parts aren’t eroded.
From the perspective of someone who’s spent a lot of time in working groups of Occupy Boston, what I love about this story is that it’s early evidence of what Occupy can and will do, beyond “changing the discourse,” which is the best that sympathetic people who haven’t been involved seem to be able to say about Occupy, or just going away and dying off, which is what non-sympathizers think has happened to Occupy. Many of us have been quietly working away over the winter, and the results will start to be seen in the coming months.
If Chris Sturr’s expectation ultimately proves correct, it will be nice to watch the pro-Wall Street, teevee pundits get challenged by some worthy opponents.
Comments Off on Congress Could Be Quite Different After 2012 Elections
They come up for re-election every two years. Each of the 435 members of the House of Representatives is in a constant “campaign mode” because the term of office is so short. Lee White of the American Historical Association summed-up the impact of the 2010 elections this way:
On Tuesday, November 2, 2010, U.S. voters dramatically changed the landscape in Washington. Republicans gained control of the House and, although the Democrats retained control of the Senate their margin in that body has been reduced to 53-47.
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Clearly the most dramatic change will be in the House with new Republican committee and subcommittee chairs taking over.
Voter discontent was revealed by the fact that just before the 2010 elections, the Congressional approval rating was at 17 percent. More recently, according to a Gallup poll, taken during April 7-11 of 2011, Congressional job approval is now back down to 17 percent, after a bump up to 23 percent in February. Of particular interest were the conclusions drawn by the pollsters at Gallup concerning the implications of the latest polling results:
Congress’ approval rating in Gallup’s April 7-11 survey is just four points above its all-time low. The probability of a significant improvement in congressional approval in the months ahead is not high. Congress is now engaged in a highly contentious battle over the federal budget, with a controversial vote on the federal debt ceiling forthcoming in the next several months. The Republican-controlled House often appears to be battling with itself, as conservative newly elected House members hold out for substantial cuts in government spending. Additionally, Americans’ economic confidence is as low as it has been since last summer, and satisfaction with the way things are going in the U.S. is at 19%.
At this point, it appears as though we could be looking at an even larger crop of freshmen in the 2013 Congress than we saw in January, 2011. (According to polling guru, Nate Silver, the fate of the 33 Senate incumbents is still an open question.)
One poster child for voter ire could be Republican Congressman Spencer Bachus of Alabama. You might recall that at approximately this time last year, Matt Taibbi wrote another one of his great exposés for Rolling Stone entitled, “Looting Main Street”. In his exceptional style, Taibbi explained how JPMorgan Chase bribed the local crooked politicians into replacing Jefferson County’s bonds, issued to finance an expensive sewer project, with variable interest rate swaps (also known as synthetic rate swaps). Then came the financial crisis. As a result, the rate Jefferson County had to pay on the bonds went up while the rates paid by banks to the county went down. It didn’t take long for the bond rating companies to downgrade those sewer bonds to “junk” status.
JPMorgan Chase unsuccessfully attempted to dismiss a lawsuit arising from this snafu. Law 360 reported on April 15 that the Alabama Supreme Court recently affirmed the denial of JPMorgan’s attempt to dismiss the case, which was based on these facts:
Jefferson County accuses JPMorgan of paying bribes to county officials in exchange for an appointment as lead underwriter for what turned out to be a highly risky refinancing of the county’s sewer debt, which caused Jefferson County billions of dollars in losses. According to the complaint, JPMorgan, JPMorgan Chase and underwriting firm Blount Parrish & Co. handed out bribes, kickbacks and payoffs to swindle the county out of millions in inflated fees.
JPMorgan claimed that only the Governor of Alabama had authority to bring such a suit. I wonder why former Alabama Governor Bob Riley didn’t bother to join Jefferson County as a party plaintiff, making the issue moot and saving Jefferson County some legal fees, before the case found its way to the state Supreme Court?
Joe Nocera of The New York Times recently put the spotlight on another character from Alabama politics:
Has Spencer Bachus, as the local congressman, decried this debacle? Of course – what local congressman wouldn’t? In a letter last year to Mary Schapiro, the chairwoman of the S.E.C., he said that the county’s financing schemes “magnified the inherent risks of the municipal finance market.”
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Bachus is not just your garden variety local congressman, though. As chairman of the Financial Services Committee, he is uniquely positioned to help make sure that similar disasters never happen again – not just in Jefferson County but anywhere. After all, the new Dodd-Frank financial reform law will, at long last, regulate derivatives. And the implementation of that law is being overseen by Bachus and his committee.
Among its many provisions related to derivatives – all designed to lessen their systemic risk – is a series of rules that would make it close to impossible for the likes of JPMorgan to pawn risky derivatives off on municipalities. Dodd-Frank requires sellers of derivatives to take a near-fiduciary interest in the well-being of a municipality.
You would think Bachus would want these regulations in place as quickly as possible, given the pain his constituents are suffering. Yet, last week, along with a handful of other House Republican bigwigs, he introduced legislation that would do just the opposite: It would delay derivative regulation until January 2013.
As Joe Nocera suggested, this might be more than simply a delaying tactic, to keep derivatives trading unregulated for another two years. Bachus could be counting on Republican takeovers of the Senate and the White House after the 2012 election cycle. At that point, Bachus and his fellow Tools of Wall Street could finally drive a stake through the heart of the nearly-stillborn baby known as “financial reform”.
On the other hand, the people vested with the authority to cast those votes that keep Spencer Bachus in office, could realize that he is betraying them in favor of the Wall Street banksters. The “public memory” may be short but – fortunately – the term of office for a Congressman is equally brief.
People are finally beginning to understand how our elected officials are benefiting from a system of “legalized graft” in the form of campaign contributions. Voters have seen so many politicians breach their campaign promises while providing new meaning to the expression “follow the money”, that there now seems to be a resigned acceptance that political payoffs are an uncomfortable fact of life. Worse yet, most people aren’t aware of another loophole in the law allowing Congress-cretins to make real money.
On January 26, 2009, Congressman Brian Baird introduced H.R.682, the “Stop Trading on Congressional Knowledge Act” (STOCK Act). The bill was intended to resolve the situation concerning one of the more sleazy “perks” of serving in Congress. As it presently stands, the law prohibiting “insider trading” (e.g. acting on confidential corporate information when making a transaction involving that company’s publicly-traded stock) does not apply to members of Congress. Remember how Martha Stewart went to prison? Well, if she had been representing Connecticut in Congress, she might have been able to interpose the defense that she was inspired to sell her ImClone stock based on information she acquired in the exercise of her official duties. In that scenario, Ms. Stewart’s sale of the ImClone stock would have been entirely legal. That’s because the laws which apply to you and I do not apply to those in Congress. Needless to say, within six months of its introduction, H.R.682 was referred to the Subcommittee on the Constitution, Civil Rights, and Civil Liberties where it died of neglect. Since that time, there have been no further efforts to propose similar legislation.
Here is a summary of the most important provisions of the “Stop Trading on Congressional Knowledge Act”:
Amends the Securities Exchange Act of 1934 and the Commodities Exchange Act to direct both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to prohibit purchase or sale of either securities or commodities for future delivery by a person in possession of material nonpublic information regarding pending or prospective legislative action if the information was obtained: (1) knowingly from a Member or employee of Congress; (2) by reason of being a Member or employee of Congress; and (3) other federal employees.
Amends the Code of Official Conduct of the Rules of the House of Representatives to prohibit designated House personnel from disclosing material nonpublic information relating to any pending or prospective legislative action relating to either securities of a publicly-traded company or a commodity if such personnel has reason to believe that the information will be used to buy or sell the securities or commodity based on such information.
Back in September of 2009, a report by American Public Media’s Steve Henn discussed the investment transactions made by some Senators in September of 2008, after having been informed by former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, that our financial system was on the verge of a meltdown. After quoting then GOP House Minority Leader John Boehner’s public acknowledgement that:
We clearly have an unprecedented crisis in our financial system. . . .
On behalf of the American people our job is to put our partisan differences aside and to work together to help solve this crisis.
Mr. Henn proceeded to explain how swift Senatorial action resulted in a bipartisan exercise of greed:
The next day, according to personal financial disclosures, Boehner cashed out of a fund designed to profit from inflation. Since he sold, it’s lost more than half its value.
Sen. Dick Durbin, an Illinois Democrat, who was also at that meeting sold more than $40,000 in mutual funds and reinvested it all with Warren Buffett.
Durbin said like millions of others he was worried about his retirement. Boehner says his stock broker acted alone without even talking to him. Both lawmakers say they didn’t benefit from any special tips.
But over time members of Congress do much better than the rest of us when playing the stock market.
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The value of information that flows from the inner workings of Washington isn’t lost on Wall Street professionals.
Michael Bagley is a former congressional staffer who now runs the OSINT Group. Bagley sells access and research. His clients are hedge funds, and he makes it his business to mine Congress and the rest of Washington for tips.
MICHAEL Bagley:The power center of finance has moved from Wall Street to Washington.
His firm is just one recent entry into Washington’s newest growth industry.
CRAIG HOLMAN:It’s called political intelligence.
Craig Holman is at Public Citizen, a consumer watchdog. Holman believes lobbyists shouldn’t be allowed to sell tips to hedge funds and members of Congress shouldn’t trade on non-public information. But right now it’s legal.
HOLMAN:It’s absolutely incredible, but the Securities and Exchange Act does not apply to members of Congress, congressional staff or even lobbyists.
That law bans corporate insiders, from executives to their bankers and lawyers, from trading on inside information. But it doesn’t apply to political intelligence. That makes this business lucrative. Bagley says firms can charge hedge funds $25,000 a month just to follow a hot issue.
BAGLEY:So information is a commodity in Washington.
Inside information on dozens of issues, from bank capitol requirements to new student loan rules, can move markets. Consumer advocate Craig Holman is backing a bill called the STOCK Act. Introduced in the House, it would force political-intelligence firms to disclose their clients and it would ban lawmakers, staffers, and lobbyists from profiting on non-public knowledge.
Mr. Henn’s report went on to raise concern over the fact that there is nothing to stop members of Congress from acting on such information to the detriment of their constituents in favor of their own portfolios.
Take a look at the list below from opensecrets.org concerning the wealthiest members of Congress. In light of the fact that these knaves are able to trade on “inside information” you now have the answer to the following question from the opensecrets website:
Congressional members’ personal wealth keeps expanding year after year, typically at rates well beyond inflation and any tax increases. The same cannot be said for most Americans. Are your representatives getting rich in Congress and, if so, how?
Jay Rockefeller’s position on the list is easy to understand, given the fact that he is the great-grandson of John D. Rockefeller. How the first eight people on the list were able to become more wealthy than Jay Rockefeller should be matter of interest to the voting public. In the case of #10 — California Senator Dianne Feinstein — we have an interesting situation. As chair of the Senate Military Construction Appropriations subcommittee, she helped her husband, Iraq war profiteer Richard C. Blum, benefit from decisions she made as chair of that subcommittee. In an article for bohemian.com, Peter Byrne discussed how Senator Feinstein was routinely informed about specific federal projects coming before her in which one of her husband’s businesses had a stake. As Byrne’s article explained, the inside information Feinstein received was intended to help the senator avoid conflicts of interest, although it had the effect of exacerbating such conflicts.
“Inside information” empowers the party in possession of that knowledge with something known as “information asymmetry”, allowing that person to take advantage of (or steal from) the less-informed person on the other side of the trade. Because membership in Congress includes a license to steal, can we ever expect those same individuals to surrender those licenses? Well, if they were honest . . .
There seems to be a consensus that bond traders are smarter than stock traders. Consider this thought from Investopedia’s Financial Edge website:
Many investors believe bond traders understand the economy better than equity traders. Bond traders pay very close attention to any economic factor that might affect interest rates. Equity traders recognize that changes in bond prices provide a good indication of what bond traders think of the economy.
Widespread belief that Ben Bernanke’s Zero Interest Rate Policy (ZIRP) has created a stock market “bubble” has led to fear that the bubble may soon pop and cause the market to crash. It was strange to see that subject discussed by John Melloy at CNBC, given the news outlet’s reputation for stock market cheerleading. Nevertheless, Mr. Melloy recently presented us with some ominous information:
The Yale School of Management since 1989 has asked wealthy individual investors monthly to give the “probability of a catastrophic stock market crash in the U.S. in the next six months.”
In the latest survey in December, almost 75 percent of respondents gave it at least a 10 percent chance of happening. That’s up from 68 percent who gave it a 10 percent probability last April, just before the events of May 6, 2010.
* * *
The Flash Crash Commission – containing members of the CFTC and SEC – made a series of recommendations for improving market structure Friday, including single stock circuit breakers, a more reliable audit trail on trades, and curbing the use of cancelled trades by high-frequency traders. They still don’t know what actually caused the nearly 1,000-point drop in the Dow Jones Industrial Average in a matter of minutes.
* * *
Overall volume has been very light in the market though, as the individual investor put more money into bonds last year than stocks in spite of the gains. Strategists said this has been one of the longer bull markets (starting in March 2009) with barely any retail participation. Flows into equity mutual funds did turn positive in January and have continued this month however, according to ICI and TrimTabs.com. Yet the fear of a crash persists.
Whether or not one is concerned about the possibility of a market crash, consensual ambivalence toward equities is on the rise. Felix Salmon recently wrote an article for The New York Times entitled, “Wall Street’s Dead End”, which began with the observation that the number of companies listed on the major domestic exchanges peaked in 1997 and has been declining ever since. Mr. Salmon discussed the recent trend toward private financing of corporations, as opposed to the tradition of raising capital by offering shares for sale on the stock exchanges:
Only the biggest and oldest companies are happy being listed on public markets today. As a result, the stock market as a whole increasingly fails to reflect the vibrancy and heterogeneity of the broader economy. To invest in younger, smaller companies, you increasingly need to be a member of the ultra-rich elite.
At risk, then, is the shareholder democracy that America forged, slowly, over the past 50 years. Civilians, rather than plutocrats, controlled corporate America, and that relationship improved standards of living and usually kept the worst of corporate abuses in check. With America Inc. owned by its citizens, the success of American business translated into large gains in the stock portfolios of anybody who put his savings in the market over most of the postwar period.
Today, however, stock markets, once the bedrock of American capitalism, are slowly becoming a noisy sideshow that churns out increasingly meager returns. The show still gets lots of attention, but the real business of the global economy is inexorably leaving the stock market — and the vast majority of us — behind.
His latest investment letter identifies four scenarios in which bondholders would get burned. Basically these are sovereign default, currency devaluation, inflation, and poor returns relative to other asset classes.
In other words, you can’t win. Gross compares Ben Bernanke to the devil and calls ZIRP a devil’s haircut: “This is not God’s work – it has the unmistakable odor of Mammon.”
Gross recommends putting money in foreign bonds and other assets that yield more than Treasuries.
I was particularly impressed with what Bill Gross had to say about the necessary steps for making America more competitive in the global marketplace:
We need to find a new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again. We must have a President whose idea of “centrist” policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship. We need a President who does more than propose “Win The Future” at annual State of the Union addresses without policy follow-up. America requires more than a makeover or a facelift. It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system. It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola. Are record corporate profits a fair price for America’s soul? A devil’s bargain more than likely.
You can’t discuss bond fund managers these days, without mentioning Jeffrey Gundlach, who recently founded DoubleLine Capital. Jonathan Laing of Barron’s wrote a great article about Gundlach entitled “The King of Bonds”. When I reached the third paragraph of that piece, I had to re-read this startling fact:
His DoubleLine Total Return Bond Fund (DBLTX), with $4.5 billion of assets as of Jan. 31, outperformed every one of the 91 bond funds in the Morningstar intermediate-bond-fund universe in 2010, despite launching only in April. It notched a total return of 16.6%, compared with returns of 8.36% for the giant Pimco Total Return Fund (PTTAX), run by the redoubtable Bill Gross . . .
The essay described how Gundlach’s former employer, TCW, feared that Gundlach was planning to leave the firm. Accordingly, TCW made a pre-emptive strike and fired Gundlach. From there, the story gets more interesting:
Five weeks after Gundlach’s dismissal, TCW sued the manager, four subordinates and DoubleLine for allegedly stealing trade secrets, including client lists, transaction information and proprietary security-valuation systems. The suit also charged that a search of Gundlach’s offices had turned up a trove of porn magazines, X-rated DVDs and sexual devices, as well as marijuana.
* * *
He charges TCW with employing “smear tactics … to destroy our business.” As for “the sex tapes and such,” he says, they represented “a closed chapter in my life.”
That’s certainly easy to understand. Porn just hasn’t been the same since Ginger Lynn retired.
Jeff Gundlach’s December webcast entitled, “Independence Day” can be found here. Take a good look at the graph on page 16: “Top 0.1% Income Earners Share of Total Income”. It’s just one of many reminders that our country is headed in the wrong direction.
Although the drumbeat continues, I remain skeptical as to whether any of the criminals responsible for causing the financial crisis will ever be brought to justice. In the weeks before President Obama’s Inauguration, the foremost question on my mind was whether the new administration would take the necessary steps to change the culture of corruption on Wall Street:
As we approach the eve of the Obama Administration’s first day, across America the new President’s supporters have visions of “change we can believe in” dancing in their heads. For some, this change means the long overdue realization of health care reform. For those active in the Democratic campaigns of 2006, “change” means an end to the Iraq war. Many Americans are hoping that the new administration will crack down on the unregulated activities on Wall Street that helped bring about the current economic crisis.
On December 15, Stephen Labaton wrote an article for the New York Times, examining the recent failures of the Securities and Exchange Commission as well as the environment at the SEC that facilitates such breakdowns.
At that time, I also focused on the point made in a commentary by Michael Lewis and David Einhorn, which appeared in the January 3 New York Times:
It’s not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.
I concluded that piece with a rhetorical question:
Let’s hope our new President, the Congress and others pay serious attention to what Lewis and Einhorn have said. Cleaning up Wall Street is going to be a dirty job. Will those responsible for accomplishing this task be up to doing it?
By March 23, 2009, it had become obvious that our new President was more concerned about the “welfare” (pun intended) of the Wall Street banks than the well-being of the American economy. I began my posting of that date with this statement:
We the people, who voted for Barack Obama, are about to get ripped off by our favorite Hope dealer.
On August 27 of that year, I wrote another piece expressing my disappointment with how things had (not) progressed. My October 1, 2009 posting focused on the fact that H. David Kotz, Inspector General of the Securities and Exchange Commission, issued two reports, recommending 58 changes to improve the way the agency investigates and enforces violations of securities laws, as a result of the SEC’s failure to investigate the Bernie Madoff Ponzi scheme. The reports exposed a shocking degree of ineptitude at the SEC.
After the release of the report by bankruptcy examiner Anton Valukas, pinpointing the causes of the collapse of Lehman Brothers, I lamented the fact that the mainstream media hadn’t shown much concern about the matter, despite the terrible fraud exposed in the report. Nevertheless, by the next day, I was able to highlight some great commentaries on the Valukas Report and I felt optimistic enough to conclude the piece with this thought:
We can only hope that a continued investigation into the Lehman scandal will result in a very bright light directed on those privileged plutocrats who consider themselves above the law.
If only . . .
By the eve of the mid-term elections, I had an answer to the question I had posed on January 5, 2009 as to whether our new President and Congress would be up to the task of cleaning up Wall Street:
One common theme voiced by many critics of the Obama administration has been its lack of interest in prosecuting those responsible for causing the financial crisis. Don’t hold your breath waiting for Attorney General Eric Hold-harmless to initiate any criminal proceedings against such noteworthy individuals as Countrywide’s Angelo Mozilo or Dick Fuld of Lehman Brothers. On October 23, Frank Rich of The New York Times mentioned both of those individuals while lamenting the administration’s failure to prosecute the “financial crimes that devastated the nation”:
The Obama administration seems not to have a prosecutorial gene. It’s shy about calling a fraud a fraud when it occurs in high finance.
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Since Obama has neither aggressively pursued the crash’s con men nor compellingly explained how they gamed the system, he sometimes looks as if he’s fronting for the industry even if he’s not.
The special treatment afforded to the perpetrators of the frauds that helped create the financial crisis wasn’t the only gift to Wall Street from the Democratically-controlled White House, Senate and Congress. The financial “reform” bill was so badly compromised (by the Administration and Senate Democrats, themselves) as it worked its way through the legislative process, that it is now commonly regarded as nothing more than a hoax.
By the close of 2010, I noted that an expanding number of commentators shared my outrage over the likelihood that we would never see any prosecutions result from the crimes that brought about the financial crisis:
A recent article written by former New York Mayor Ed Koch began with the grim observation that no criminal charges have been brought against any of the malefactors responsible for causing the financial crisis:
Looking back on 2010 and the Great Recession, I continue to be enraged by the lack of accountability for those who wrecked our economy and brought the U.S. to its knees. The shocking truth is that those who did the damage are still in charge. Many who ran Wall Street before and during the debacle are either still there making millions, if not billions, of dollars, or are in charge of our country’s economic policies which led to the debacle.
Most recently, Matt Taibbi has written another great article for Rolling Stone entitled, “Why Isn’t Wall Street in Jail?”. It’s nice to know that the drumbeat for justice continues. Taibbi’s essay provided a great history of the crisis, with a particular emphasis on how whistleblowers were ignored, just as Harry Markopolos was ignored when (in May of 2000) he tried to alert the SEC to the fact that Bernie Madoff’s hedge fund was a multi-billion-dollar Ponzi scheme. Here is a great passage from Matt Taibbi’s essay:
In the past few years, the administration has allocated massive amounts of federal resources to catching wrongdoers — of a certain type. Last year, the government deported 393,000 people, at a cost of $5 billion. Since 2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony prosecutions by 259 percent. In Ohio last month, a single mother was caught lying about where she lived to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in jail for fraud, declaring that letting her go free would “demean the seriousness” of the offenses.
So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero. The math makes sense only because the politics are so obvious. You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing a billion dollars? For fraud that puts a million people into foreclosure? Pass. It’s not a crime. Prison is too harsh. Get them to say they’re sorry, and move on. Oh, wait — let’s not even make them say they’re sorry. That’s too mean; let’s just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead. But don’t make them pay it out of their own pockets, and don’t ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year. What’s next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?
Wouldn’t it be nice if public opinion meant more to the Obama administration than campaign contributions from Wall Street banksters?
January 21 brought us Episode 199 of HBO’s Real Time with Bill Maher. At the end of the program, Bill went through his popular “New Rules” segment. On this occasion, he wound it up with a rant about how the Republicans were exclusively at fault for the financial crisis. Aside from the fact that this claim was historically inaccurate, it was not at all fair to David Stockman (a guest on that night’s show) who had to sit through Maher’s diatribe without an opportunity to point out the errors. (On the other hand, I was fine with watching Stephen Moore twist in the wind as Maher went through that tirade.)
That incident underscored the obvious need for Bill Maher to invite William Black as a guest on the show in order to clarify this issue. Prior to that episode, Black had written an essay, which appeared on The Big Picture website. Although the theme of that piece was to debunk the “mantra of the Republican Party” that “regulation is a job killer”, Black emphasized that Democrats had a role in “deregulation, desupervision, and de facto decriminalization (the three ‘des’)” which created the “criminogenic environment” precipitating the financial crisis:
The Great Recession was triggered by the collapse of the real estate bubble epidemic of mortgage fraud by lenders that hyper-inflated that bubble. That epidemic could not have happened without the appointment of anti-regulators to key leadership positions. The epidemic of mortgage fraud was centered on loans that the lending industry (behind closed doors) referred to as “liar’s” loans — so any regulatory leader who was not an anti-regulatory ideologue would (as we did in the early 1990s during the first wave of liar’s loans in California) have ordered banks not to make these pervasively fraudulent loans.
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From roughly 1999 to the present, three administrations have displayed hostility to vigorous regulation and have appointed regulatory leaders largely on the basis of their opposition to vigorous regulation. When these administrations occasionally blundered and appointed, or inherited, regulatory leaders that believed in regulating, the administration attacked the regulators. In the financial regulatory sphere, recent examples include Arthur Levitt and William Donaldson (SEC), Brooksley Born (CFTC), and Sheila Bair (FDIC).
Similarly, the bankers used Congress to extort the Financial Accounting Standards Board (FASB) into trashing the accounting rules so that the banks no longer had to recognize their losses. The twin purposes of that bit of successful thuggery were to evade the mandate of the Prompt Corrective Action (PCA) law and to allow banks to pretend that they were solvent and profitable so that they could continue to pay enormous bonuses to their senior officials based on the fictional “income” and “net worth” produced by the scam accounting. (Not recognizing one’s losses increases dollar-for-dollar reported, but fictional, net worth and gross income.)
When members of Congress (mostly Democrats) sought to intimidate us into not taking enforcement actions against the fraudulent S&Ls we blew the whistle.
President Obama’s January 18 opinion piece for The Wall Street Journalprompted a retort from Bill Black. The President announced that he had signed an executive order requiring “a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive”. Obama’s focus on “regulations that stifle job creation” seemed to exemplify what Black had just discussed one day earlier. Accordingly, Bill Black wrote an essay for The Huffington Poston January 19, which began this way:
I get President Obama’s “regulatory review” plan, I really do. His game plan is a straight steal from President Clinton’s strategy after the Republican’s 1994 congressional triumph. Clinton’s strategy was to steal the Republican Party’s play book. I know that Clinton’s strategy was considered brilliant politics (particularly by the Clintonites), but the Republican financial playbook produces recurrent, intensifying fraud epidemics and financial crises. Rubin and Summers were Clinton’s offensive coordinators. They planned and implemented the Republican game plan on finance. Rubin and Summers were good choices for this role because they were, and remain, reflexively anti-regulatory. They led the deregulation and attack on supervision that began to create the criminogenic environment that produced the financial crisis.
Bill Clinton’s role in facilitating the financial crisis would have surely become an issue in the 2008 Presidential election campaign, had Hillary Clinton been the Democratic nominee. Instead, the Democrats got behind a “Trojan horse” candidate, disguised in the trappings of “Change” who, once elected, re-installed the very people who implemented the crucial deregulatory changes which caused the financial crisis. Bill Black provided this explanation:
The zeal, crude threats, and arrogance they displayed in leading the attacks on SEC Chair Levitt and CFTC Chair Born’s efforts to adopt regulations that would have reduced the risks of fraud and financial crises were exceptional. Just one problem — they were wrong and Levitt and Born were right. Rubin and Summers weren’t slightly wrong; they put us on the path to the Great Recession. Obama knows that Clinton’s brilliant political strategy, stealing the Republican play book, was a disaster for the nation, but he has picked politics over substance.
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Obama’s proposal and the accompanying OMB releases do not mention the word or the concept of fraud. Despite an “epidemic” of fraud led by the bank CEOs (which caused the greatest crisis of his life), Obama cannot bring itself to use the “f” word. The administration wants the banks’ senior officers to fund its reelection campaign. I’ve never raised political contributions, but I’m certain that pointing out that a large number of senior bank officers were frauds would make fundraising from them awkward.
Black targeted Obama’s lame gesture toward acknowledgement of some need for regulation, encapsulated in the statement that “(w)here necessary, we won’t shy away from addressing obvious gaps …”:
Huh? The vital task is to find the non-obvious gaps. Why, two years into his presidency, has the administration failed to address “obvious gaps”? The administration does not need Republican approval to fill obvious gaps in regulation. Even when Obama finds “obvious gaps” in regulatory protection he does not promise to act. He will act only “where necessary.” We know that Summers, Rubin, and Geithner rarely believe that financial regulation is “necessary.” Even if Obama decides it is “necessary” to act he only promises to “address” “obvious gaps” — not “end” or “fill” them.
At the conclusion of his Huffington Post essay, Black provided his own list of “obvious gaps” described as the “Dirty Dozen” — “. . . obvious gaps in financial regulation which have persisted and grown during this, Obama’s first two years in office.”
Bill Black is just one of many commentators to annotate the complicity of Democrats in causing the financial crisis. Beyond that, Black has illustrated how President Obama has preserved – and possibly enhanced — the “criminogenic” milieu which could bring about another financial crisis.
The first step toward implementing “bipartisan solutions” to our nation’s ills should involve acknowledging the extent to which the fault for those problems is bipartisan.
Ted Kaufman filled Joe Biden’s seat representing the state of Delaware in the United States Senate on January 15, 2009, when Biden resigned to serve as Vice-President. Kaufman’s 22-month term as Senator concluded on November 15, when Chris Coons was sworn in after defeating Christine O’Donnell in the 2010 election.
Senator Kaufman served as Chairman of the Congressional Oversight Panel – the entity created to monitor TARP on behalf of Congress. The panel’s November Oversight Report was released at the COP website with an embedded, five-minute video of Senator Kaufman’s introduction to the Report. At the DelawareOnline website, Nicole Gaudiano began her article about Kaufman’s term by pointing out that C-SPAN ranked Kaufman as the 10th-highest among Senators for the number of days (126) when he spoke on the Senate floor during the current Congressional session. Senator Kaufman was a high-profile advocate of financial reform, who devoted a good deal of effort toward investigating the causes of the 2008 financial crisis.
On November 9, Senator Kaufman was interviewed by NPR’s Robert Siegel, who immediately focused on the fact that aside from the Securities and Exchange Commission’s civil suit against Goldman Sachs and the small fine levied against Goldman by FINRA, we have yet to see any criminal prosecutions arising from the fraud and other violations of federal law which caused the financial crisis. Kaufman responded by asserting his belief that those prosecutions will eventually proceed, although “it takes a while” to investigate and prepare these very complex cases:
When you commit fraud on Wall Street or endanger it, you have good attorneys around you to kind of clean up after you. So they clean up as they go. And then when you actually go to trial, these are very, very, very complex cases. But I still think we will have some good cases. And I also think that if isn’t a deterrent, they will continue to do that. And I think we have the people in place now at the Securities Exchange Commission and the Justice Department to hold them accountable.
We can only hope so . . .
Back on March 17, I discussed a number of reactions to the recently-released Valukas Report on the demise of Lehman Brothers, which exposed the complete lack of oversight by the Federal Reserve Bank of New York — the entity with investigators in place inside of Lehman Brothers after the collapse of Bear Stearns. The FRBNY had the perfect vantage point to conduct effective oversight of Lehman. Not only did the FRBNY fail to do so — it actually helped Lehman maintain a false image of being financially solvent. It is important to keep in mind that Lehman CEO Richard Fuld was a class B director of the FRBNY during this period. Senator Kaufman’s reaction to the Valukas Report resulted in his widely-quoted March 15 speech from the Senate floor, in which he emphasized that the government needs to return the rule of law to Wall Street:
We all understood that to restore the public’s faith in our financial markets and the rule of law, we must identify, prosecute, and send to prison the participants in those markets who broke the law. Their fraudulent conduct has severely damaged our economy, caused devastating and sustained harm to countless hard-working Americans, and contributed to the widespread view that Wall Street does not play by the same rules as Main Street.
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Many have said we should not seek to “punish” anyone, as all of Wall Street was in a delirium of profit-making and almost no one foresaw the sub-prime crisis caused by the dramatic decline in housing values. But this is not about retribution. This is about addressing the continuum of behavior that took place — some of it fraudulent and illegal — and in the process addressing what Wall Street and the legal and regulatory system underlying its behavior have become.
As part of that effort, we must ensure that the legal system tackles financial crimes with the same gravity as other crimes.
The nagging suspicion that those nefarious activities at Lehman Brothers could be taking place “at other banks as well” became a key point in Senator Kaufman’s speech:
Mr. President, I’m concerned that the revelations about Lehman Brothers are just the tip of the iceberg. We have no reason to believe that the conduct detailed last week is somehow isolated or unique. Indeed, this sort of behavior is hardly novel. Enron engaged in similar deceit with some of its assets. And while we don’t have the benefit of an examiner’s report for other firms with a business model like Lehman’s, law enforcement authorities should be well on their way in conducting investigations of whether others used similar “accounting gimmicks” to hide dangerous risk from investors and the public.
Within a few months after that speech by Senator Kaufman, a weak financial reform bill was enacted to appease (or more importantly: deceive) the outraged taxpayers. Despite that legislative sham, polling results documented the increased public skepticism about the government’s ability or willingness to do right by the American public.
On October 20, Sam Gustin interviewed economist Joseph Stiglitz for the DailyFinance website. Their discussion focused on the recent legislative attempt to address the causes of the financial crisis. Professor Stiglitz emphasized the legal system’s inability to control that type of sleazy behavior:
The corporations have the right to give campaign contributions. So basically we have a system in which the corporate executives, the CEOs, are trying to make sure the legal system works not for the companies, not for the shareholders, not for the bondholders – but for themselves.
So it’s like theft, if you want to think about it that way. These corporations are basically now working now for the CEOs and the executives and not for any of the other stakeholders in the corporation, let alone for our broader society.
You look at who won with the excessive risk-taking and shortsighted behavior of the banks. It wasn’t the shareholder or the bondholders. It certainly wasn’t American taxpayers. It wasn’t American workers. It wasn’t American homeowners. It was the CEOs, the executives.
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Economists focus on the whole notion of incentives. People have an incentive sometimes to behave badly, because they can make more money if they can cheat. If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.
And that’s why, for instance, in our antitrust law, we often don’t catch people when they behave badly, but when we do we say there are treble damages. You pay three times the amount of the damage that you do. That’s a strong deterrent.
For now, there are no such deterrents for those CEOs who nearly collapsed the American economy and destroyed 15 million jobs. Robert Scheer recently provided us with an update about what life is now like for Sandy Weill, the former CEO of Citigroup. Scheer’s essay – entitled “The Man Who Shattered Our Economy” revealed that Weill just purchased a vineyard estate in Sonoma, California for a record $31 million. That number should serve as a guidepost when considering the proposition expressed by Professor Stiglitz:
If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.
One of my favorite commentators, Bill Fleckenstein, wrote an interesting piece calling attention to the fact that the Patent Office is underfunded to the tune of about $1 billion. The good news is that fixing this problem might create as many as 2.5 million new jobs over the next three years. Fleck based his article on a New York Timesessay by Paul Michel (former Chief Judge of the United States Court of Appeals for the District of Columbia Circuit) and Henry Nothhaft, co-author of the upcoming book, Great Again.
Bill Fleckenstein began his discussion by noting another letdown by our Disappointer-In-Chief:
As the financial crisis was unfolding in late 2008 and early 2009, I actually thought for a while that the incoming Obama administration might try to do something intelligent regarding incentivizing jobs. That was 100% incorrect. The only incentives it has created are ones not to hire more employees, which has only made a bad situation worse.
Unfortunately, Fleck decided to support his perspective with an editorial from the August 9 Wall Street Journal entitled, “Why I’m Not Hiring” by Michael Fleischer. Fleischer whined about how President Obama has made things difficult for his “little company in New Jersey, where we provide audio systems for use in educational, commercial and industrial settings.” Fleischer concluded the piece with this lament:
And even if the economic outlook were more encouraging, increasing revenues is always uncertain and expensive. As much as I might want to hire new salespeople, engineers and marketing staff in an effort to grow, I would be increasing my company’s vulnerability to government decisions to raise taxes, to policies that make health insurance more expensive, and to the difficulties of this economic environment.
A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up. From where I sit, the government’s message is unmistakable: Creating a new job carries a punishing price.
Bill Fleckenstein was not the only commentator who was apparently “taken in” by this editorial. It has been getting re-blogged all over the Web.
What most people don’t realize is that the author of the Wall Street Journal editorial, Michael Fleischer, is the brother of Ari Fleischer, the former press secretary to President George W. Bush.
Kevin Drum wrote a piece for Mother Jones, which began with his criticism of the Journal for not admitting that the aforementioned editorial was written by Ari Fleischer’s brother. Beyond that, Mr. Drum provided us with a little more information about Michael Fleischer’s background:
Michael, thanks to his White House connections, was one of the squadron of free market evangelizers who parachuted into Baghdad to privatize Iraqi industry after the war. We all know how well that went, which is probably what qualifies him to write op-eds about creeping Obama-ism for the Wall Street Journal.
Drum then quoted this reader’s comment, posted at the Outside The Beltway blog, concerning the Fleischer editorial:
The fact is that if Mr. Fleisher’s company has to buy an extra box of paper clips it will cause them to go belly up. He’s in not position to hire anyone regardless of tax policy.
The reason Mr. Fleischer’s company isn’t hiring has nothing to do with taxes or the policies of any administration. It’s because his business has been in decline for a decade. As the CEO, that decline is his fault. All his complaining about taxes and benefits is just a smokescreen for his own incompetence.
The world changed around them a decade ago and they failed to adapt. In 2000, their annual sales were 66 million dollars with cash on hand of 12 million. By 2003, sales were down to 55 million and cash was down to 6 million. That was before the financial crisis and under the allegedly pro business policies of the previous administration. In 2009, sales were down to 44 million and cash was down to 2 million. They managed to lose 17 million dollars that year and got a carry back refund of some 5 million dollars. Mr. Fleischer should spend less time complaining about taxes and more time thinking about how he can correct 10 years of mismanagement.
Don’t take my word for it, read the balance sheets yourself.
Another blogger had some fun digging into the truth about Fleischer’s Bogen Communications and hanging out the dirty laundry on the Internet:
Here’s the thing, though. If you actually look into Bogen, you find out that there are far better reasons for why Fleischer isn’t hiring. Like the stock price absolutely cratering last year. Or the settlement that they reached with a contractor who alleged “multiple causes of action for breach of contract and various torts”; a settlement that came after the contractor had already been awarded a cool $12.5 mil in “compensatory and punitive damages.”
It’s always funny when a political hatchet job gets exposed. It’s even funnier when the perpetrators are too dumb to realize that — in what Marshall McLuhan used to call “the electronic information environment” (back in the 1960s) — it’s pretty easy to dig up the truth.
Anyone trying to ascertain the truth about why companies aren’t hiring would be better served to peruse websites such as MarketWatch or Bloomberg, rather than the Wall Street Journal’s editorial page. Bill Fleckenstein should have known better.
For the past few years, investors have been flocking to exchange-traded funds (ETFs) as an alternative to mutual funds, which often penalize investors for bailing out less than 90 days after buying in. The ETFs are traded on exchanges in the same manner as individual stocks. Investors can buy however many shares of an ETF as they desire, rather than being faced with a minimum investment as required by many mutual funds. Other investors see ETFs as a less-risky alternative than buying individual stocks, since some funds consist of an assortment of stocks from a given sector.
The most recent essay by one of my favorite commentators, Paul Farrell of MarketWatch, is focused on the ETFs that are based on commodities, rather than stocks. As it turns out, the commodity ETFs have turned out to be yet another one of Wall Street’s weapons of mass financial destruction. Paul Farrell brings the reader’s attention to a number of articles written on this subject – all of which bear a theme similar to the title of Mr. Farrell’s piece: “Commodity ETFs: Toxic, deadly, evil”.
Mr. Farrell discussed a recent article from Bloomberg BusinessWeek, exposing the hazards inherent in commodity ETFs. That article began by discussing the experience of a man who invested $10,000 in an ETF called the U.S. Oil Fund (ticker symbol: USO), designed to track the price of light, sweet crude oil. The investor’s experience became a familiar theme for many who had bought into commodity ETFs:
What happened next didn’t make sense. Wolf watched oil go up as predicted, yet USO kept going down. In February 2009, for example, crude rose 7.4 percent while USO fell by 7.4 percent. What was going on?
What was going on was something called “contango”. The BusinessWeek article explained it this way:
Contango is a word traders use to describe a specific market condition, when contracts for future delivery of a commodity are more expensive than near-term contracts for the same stuff. It is common in commodity markets, though as Wolf and other investors learned, it can spell doom for commodity ETFs. When the futures contracts that commodity funds own are about to expire, fund managers have to sell them and buy new ones; otherwise they would have to take delivery of billions of dollars’ worth of raw materials. When they buy the more expensive contracts — more expensive thanks to contango — they lose money for their investors. Contango eats a fund’s seed corn, chewing away its value.
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Contango isn’t the only reason commodity ETFs make lousy buy-and-hold investments. Professional futures traders exploit the ETFs’ monthly rolls to make easy profits at the little guy’s expense. Unlike ETF managers, the professionals don’t trade at set times. They can buy the next month ahead of the big programmed rolls to drive up the price, or sell before the ETF, pushing down the price investors get paid for expiring futures. The strategy is called “pre-rolling.”
“I make a living off the dumb money,” says Emil van Essen, founder of an eponymous commodity trading company in Chicago. Van Essen developed software that predicts and profits from pre-rolling. “These index funds get eaten alive by people like me,” he says.
A look at 10 well-known funds based on commodity futures found that, since inception, all 10 have trailed the performance of their underlying raw materials, according to Bloomberg data.
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Just as they did with subprime mortgage-backed securities, Wall Street banks are transferring wealth from their clients to their trading desks. “You walk into a casino, you expect to lose money,” says Greg Forero, former director of commodities trading at UBS (UBS). “It’s the same with these products. You’re playing a game with a very high rake, a very high house advantage, and you’re not the house.”
Another problem caused by commodity ETFs is the havoc they create by raising prices of consumer goods – not because of a supply and demand effect – but purely by financial speculation:
Wheat prices jumped 52 percent in early 2008, setting records before plunging again, and sugar more than doubled last year even as the economy slowed, forcing Reinwald’s Bakery in Huntington, N.Y., to fire five of its 32 employees. “You try and budget to make money, but that’s becoming impossible to predict,” says owner Richard Reinwald, chairman of the Retail Bakers of America.
Paul Farrell also brought our attention to an article entitled “ETFs Gone Wild” to highlight the hazards these products create for the entire financial system:
In Bloomberg Markets’ “ETFs Gone Wild,” investors are warned that many ETFs are “stuffed with exotic derivatives,” at risk of becoming “the next financial time bomb.” In short, thanks to ETFs, Wall Street is already creating a dangerous new kind of global weapon of mass destruction — a bomb primed to detonate like the 2000 dot-coms, the 2008 subprimes — and detonation is dead ahead.
Mr. Farrell’s essay included a discussion of a Rolling Stone article by McKenzie Funk, describing the exploits of Phil Heilberg, a former AIG commodity trader. The Rolling Stone piece demonstrated how commodity ETFs are just the latest weapon used to advance “Chaos Capitalism”:
And yet, as Funk puts it: “Heilberg’s bet on chaos is beginning to play out on the streets.” The toxic trail of commodity ETFs is already proving to be deadly, starving thousands worldwide, while the new Capitalists of Chaos only see incredible profit opportunities, as they make huge bets that they’ll get even richer in the next round of catastrophes, disasters, poverty, starvation and wars.
Bottom line: Commodity ETF/WMDs are mutating into a toxic pandemic fueled (and protected by) the insatiable greed of banks, traders and politicians whose brains are incapable of giving up their profit machine, won’t until it implodes and self-destructs. The Wall Street Banksters have no sense of morals, no ethics, no soul, no goal in life other than getting very rich, very fast. They care nothing of democracy, civilization or the planet.
Don’t count on the faux financial “reform” bill to remedy any of the problems created by commodity ETFs. As the BusinessWeek article pointed out, the Commodity Futures Trading Commission is going to have its hands full:
How much the new law will help remains to be seen, says Jill E. Sommers, one of the agency’s five commissioners, because Congress still needs to appropriate funds and write guidelines for implementation and enforcement.
Let’s not overlook the fact that those “guidelines” are going to be written by industry lobbyists. The more things change — the more they remain the same.
TheCenterLane.com offers opinion, news and commentary on politics, the economy, finance and other random events that either find their way into the news or are ignored by the news reporting business. As the name suggests, our focus will be on what seems to be happening in The Center Lane of American politics and what the view from the Center reveals about the events in the left and right lanes. Your Host, John T. Burke, Jr., earned his Bachelor of Arts degree from Boston College with a double major in Speech Communications and Philosophy. He earned his law degree (Juris Doctor) from the Illinois Institute of Technology / Chicago-Kent College of Law.