In a nice rant intended to be an attack on AG Cuomo (who would like a "better job", natch) Dickie once again leads me to ask: "Did you pay extra at God's brain handout desk for the vacuum between your ears?"
Dick, let me ask a few "pertinent" questions....
If the "primary business" in a given state was selling crack, would you propose that doing so should be ok because, well, it's the primary business?
What if it was ripping off little old ladies?
What if it was selling swampland as "pristine real estate"?
What if it was marketing drugs that were laced with cyanide?
Or faulty cars (exploding Pintos anyone?)
If the company doing any of those things was the dominant employer in a given state, then the AG should give them a pass, right?
Oh I know, that's not what you meant.
It is, however, what you said.
If you want to go after Cuomo's record with regard to HUD, that's a valid area to explore, and Bove started there. But Fannie and Freddie's mess is not, in the main, due to subprime mortgages, nor did HUD have anything to do with OptionARMs and all the other tricky crap. Indeed the primary problem is the garbage securitizations - most of which had nothing to do with the GSEs, along with synthetics and other dubious piles of dog refuse dreamed up by Wall Street.
But arguing that an Attorney General, who's charge is to enforce the law no matter who is committing the crimes - that is, bring suits and criminal charges against people who do bad things as the laws of a given state proscribes, should exempt certain big and powerful corporations and/or individuals from those laws because they employ lots of people and/or bring in lots of tax revenue is, in effect, to demand that a State's AG partner with the Mafia!
Some of us - hopefully the dear readers of The Ticker - are too smart for that sort of rank endorsement of outrageous (and perhaps criminal) conduct and instead believe (and demand) that the correct thing for Wall Street to do is behave both ethically and lawfully.
If they do that - behave ethically and lawfully - they have nothing to fear from Mr. Cuomo - or anyone else.
In the report, the panel, that includes Rob Johnson of the United Nations Commission of Experts on Finance and bailout watchdog Elizabeth Warren, warns that financial regulatory reform measures proposed by the Obama administration and Congress must be beefed up to prevent banks from continuing to engage in high risk investing that precipitated the near collapse of the U.S. economy in 2008.
The report warns that the country is now immersed in a "doomsday cycle" wherein banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management – and when the risks go wrong, the banks receive taxpayer bailouts from the government.
The crisis of 2008 was predictable. Unless we go far beyond current legislative proposals the next crisis is inevitable.
146 pages of rather dry reading, but worth it.
I have only one argument with the paper's base premise, and that lies here:
This cycle will not run forever. One day soon, we’ll have the boom and bust phases, but when we try the usual bailouts, they won’t work. The destructive power of the down-cycle will overwhelm the restorative ability of the government, just like it did in 1929-31, when both the financial shock and the government capacity to respond were on a much smaller scale. The result, presumably, will be something that looks and feels very much like a Second Great Depression.
The error is in thinking that the "restorative power" of government has worked this time.
It has not. Instead of being a restorative power, it has instead been simple hiding of the facts - or, if you prefer a more-simple word for it, lies.
We have hidden, rather than fixing, balance-sheet deterioration. We are permitting insolvent financial institutions to continue to operate in the belief that they can "earn their way out of the hole" over time, effectively imposing a monstrous (more than $1 trillion annually, or 7% of GDP) tax on the economy. Then we have imposed another 9% tax on the economy in the form of government borrowing to paper over the lack of final demand.
Taken together, this is a 16%-of-GDP tax addition to the tax burden already imposed, and there is no evidence that it will abate.
The report talks of raising capital requirements to somewhere between 15-25% of assets for financial institutions. But that's a chimera too - not all assets are the same. As I wrote in my piece of November 13th of last year, there is a much simpler way to compute capital requirements that is not subject to regulatory arbitrage or games: do not permit institutions to make any loan that is unsecured unless the unsecured portion of that loan is backed, dollar for dollar, by a dollar of actual capital.
Regulatory arbitrage is better thought of as bribery. The solution to eliminating bribery is to eliminate all the places where one can stuff a pile of cow dung under the carpet. If the decaying fish is on the kitchen table for all to see, and the stench cannot be concealed, then it becomes extremely difficult to buy people off.
This means an end to all credit derivatives that are not exchange-traded (not "registered"), so that nightly mark-to-market accounting is enforced by a real party at interest - the exchange which has to make good on them. It means an end to "naked shorting" in all of its forms. It means an end to the creation of synthetic instruments unless the person you sell them to receives a prospectus disclosing why and how that derivative came into existence - and at who's behest it happened.
At the core of this problem, along with essentially every banking crisis in the past, is a refusal to speak publicly about the truth of financial institutions: they provide no actual constructive contribution to GDP.
That is, they produce nothing.
Financial intermediation - when it works properly - is by definition a function of matching buyers and sellers of money. That is, by definition it is a parasitic function that draws its "income" off the transactional stream of commerce.
But a parasite is only "successful" if it is able to remain healthy without significantly impairing its host. The most-obvious violation of this principle, of course, is a parasite that kills its host - that organism has failed in its essential purpose if it fails to reproduce before the host dies.
In terms of economic systems failure is more graduated. Certainly a financial system that kills the underlying economy has failed in its essential purpose. But one that imposes regressive and ridiculous effective tax rates - even when not called a tax - has taken the intermediation function and turned it into a death-spiral of vampirism.
Such is the system we have today. Banks are considered an economic force in their own right - not because they add something to GDP (they're incapable of doing so) but because they are able to control the rise, fall, birth and death of others. The financial intermediation function has become an end in of itself, instead of being a necessary piece of "lubrication" for commerce to proceed. This in turn has led to ridiculous and even outrageous acts, such as the SEC Complaint alleges occurred in Jefferson County, Alabama:
Charles LeCroy and Douglas MacFaddin, the two former managing directors, privately agreed with certain County commissioners to pay more than $8.2 million in 2002 and 20)3 to close friends of the commissioners who either owned or worked at local broker-dealers.
3. Although labeled as payments for work on the transactions, their true purpose was to ensure that County officials selected the broker-dealer, J.P. Morgan Securities Inc., as County bond underwriter, and the bank, JPMorgan Chase Bank, N.A., as County swap provider.
The common word for what is alleged, my friends, is bribe.
Yet when these sorts of things are uncovered the government, in an attempt to "not upset the apple cart" of the vampiric Wall Street mechanism, sues - instead of prosecuting! As with most of these suits this one will likely to be settled with a fine, where if you or I engaged in the same sort of corrupt practice alleged here we'd be sitting behind a set of bars for a decade or more.
The solution to these problems is not found in incrementalism. Rather, it is found in formal and legal recognition of the essential purpose of financial entities - and enforcing the boundaries of same.
In short, financial institutions are intermediaries. Their purpose and function thus inherently must come with fiduciary duty, since without that duty they have no purpose in the economy at all.
Breaches of that duty must be dealt with through harsh sanction, as the essence of their purpose and action cannot inherently come from a desire to profit, but rather their purpose is to help others profit through productive enterprise.
Viewed in this context there is nothing difficult about regulation of these entities.
They must be forced to hold one dollar of capital against each dollar of unsecured lending that is outstanding, no matter to who or on what terms.
They must be held to a fiduciary duty of care with all of their clients, irrespective of which "side" of a transaction they, or their client, happens to be on.
This inherently bars all proprietary trading activities by these institutions since doing so is an inherent and inseparable violation of that fiduciary responsibility toward the persons whom they serve. It cannot be otherwise.
Incidents of bribery, blackmail and dishonesty - irrespective of the form it comes in - must be dealt with both quickly and severely, since all such acts inherently damage the very persons who they have that fiduciary duty toward.
If we had taken this approach to financial entities there would have been no ENRON, no LTCM, no Internet Bubble, no Housing Bubble, no Greece, no AIG, no Lehman and no Bear Stearns Hedge Funds.
All of the financial crises since the 1980s - each and every one of them - would not have happened.
The answers to the problems are simple, if we choose to open our eyes and consider the only actual function that financial entities perform in our economic picture.
If you're wondering why employment is not rebounding, why The Federal Reserve's own data shows collapsing government tax revenues along with final demand in the toilet while spending is skyrocketing, you need only look at the financial system's vampiric behavior and our government's refusal to deal with those acts as they should for the answer.
For as long as we fail in this regard we will condemn ourselves to an ever-increasing "duty" or "tax" that is diverted by these institutions. This is an inherently unstable configuration and, as the financial system's effective tax rate is now reaching toward 40% of the economy as a whole (including the inputed taxes from bailouts and handouts) we are rapidly moving toward the "over-center" point (50%) where the cycle becomes self-reinforcing - and collapse becomes inevitable.
The time to do the right thing has basically run out.
SINGAPORE/CAIRO, March 1 (Reuters) - Copper is likely to climb when trading starts on Monday, lifted by uncertainty over supply after the world's top copper producer Chile was pounded by a massive earthquake, analysts said over the weekend.
The front-month contract opened up more than 8%.
This, despite the fact that the earthquake was hundreds of miles away from the mines in Chile and there was zero damage to them. Some were offline for a few hours due to power failures, but none suffered any physical or structural damage, nor did their export points and the transportation network between the two.
So why did price spike more than 8% even though all this was known by the market before it re-opened for trading?
No part of the markets are trading on fundamental values, nor on forward business expectations. They are instead trading as "hot money" repositories where speculators rotate in and out of various instruments literally on a minute-by-minute basis.
This is how crashes happen.
When there is no fundamental value underlying a market there is no floor on price. Price then becomes one thing and one thing only - the number at which you can find another sucker to take your position from you.
This is how tulip bulbs went nuts in Holland, it is how houses went nuts in California in 2005, it is how tech stocks went nuts in 1999 and it is how oil went nuts in 2008.
But now literally everything has gone this way.
Take European national debt. We now know that Italy, for example, was cooking their books as early as 1995. This means that bond buyers overpaid for their bonds and took less coupon than they should have. This should have resulted in an immediate destruction in the value of those bonds when discovered, but it did not.
Why?
Because there was still a bigger fool.
Tech stocks were the same thing in 1999. These "companies" claimed the global GDP some 100 times over between the IPO-issuers in 1998 and 1999. This, of course, is impossible. Yet people kept buying even though mathematically 99% of them had to lose all their money. Ultimately, they did exactly that.
Oil went to $150 in 2008 even though demand was cratering. It then collapsed to under $40. It is now double that, even though we have a record supply on hand, to the point that tankers are sitting around full of crude with nowhere to unload it to, and nobody to buy at the price paid. Yet the price continues to go higher.
These conditions, historically, always produce crashes. Each and every time. Go ahead and look back through history with a dispassionate eye. Find me a market that displayed a complete disconnect with fundamentals such as this and did not crash.
You can't.
The issue for investors, of course, is that it is almost impossible to determine who will finally stand up and blow a whistle that others listen to. These manias go on longer than anyone would think possible. Always. I was stunned in 1999 as the Nasdaq doubled. Likewise in 2009 I was stunned as prices went straight up on companies that based on any dispassionate analysis are worth zero - for example, every large bank with undisclosed off-balance-sheet exposures (that would be most of them.)
The overnight move in Copper is yet another confirmation point. Big banks leasing oil tankers to fill up and moor somewhere "waiting for price to go up" was the first indication that this mentality had taken hold last year. Stocks were the next, of course, and now we have it in copper.
That the "animal idiocy" came just months after the 2008 crash tells me that we've learned exactly nothing. That the idiots in places like CNBS, including most especially people like Kudlow and LIESman, who have seen enough dances to both know and be able to identify this pattern, refuse to discuss what's going on borders on criminal journalistic misconduct.
If we had indications in the real economy - that is, other than government borrow-and-spend - that we were turning the corner, I'd be a bit more sanguine. Unfortunately no such indication has appeared, despite literally six months of claims from the media that it's "just around the corner."
No it's not folks. What's around the corner is another collapse, worse than the 2008 one, because the bad debt has been stinking up the joint even more as it decays into a putrid mess.
A dead fish doesn't get more palatable the longer you leave it out on the kitchen counter. We've learned nothing collectively or in the government regulatory apparatus from the last three years - indeed, government has become drunk on the premise that it can borrow and spend over $1.5 trillion annually to present a false veneer of prosperity and economic improvement.
But borrowing money doesn't make your economy more prosperous. It indeed makes it less so, because you not only have to pay that money back some day, but for the duration of the time you have it outstanding you must also pay interest.
When I see a nation rocked by a massive earthquake and one of its major exports spikes upward by 8% in price when it is known to the market that disruption to that nation's production of that commodity from the event was zero, that's the bell being rung to tell you to be damn careful if you think "happy days are here again" - right here, right now.
I seem to remember once upon a time when Charlie Gasbag-a-rino would come on CNBS virtually on a daily basis, with the DOW down 200, and announce that Ambac, MBIA or both were "about to be bailed out" - attributed to "sources."
Only one problem with this, you see - it never happened.
Then there were the claims that Warren Buffett was going to buy, well, the world. That never happened either, but it was always good for a pump here and there in the markets - only when they were in danger of really tanking, of course.
And now we're seeing it again, this time with Greece.
Over the weekend we have seen multiple competing reports of some sort of "deal", starting right near the close of the US market on Friday. It was undoubtedly responsible for the near-meteoric rise of the futures into the lock-up - nobody would want to hold short into the weekend with such a thing happening, right?
"We have a (European) treaty under which there is no possibility of paying to bail out states in difficulty," Merkel told ARD public television.
Right.
Maybe.
But let's look at the facts here.
Is this really about bailouts?
Or is this just more criminal manipulation of markets, with certain privileged players placing bets in the marketplace, then starting rumors?
After all, the blatantly-obvious front-running of the famous August 2007 Discount Rate cut wasn't investigated - or prosecuted, even though a three-year old could look at the chart for the day before and see that obviously someone (or a group of someones) knew in advance that Bernanke was about to do that - and they traded on it.
Then there were the AMBAC/MBIA rumors, the incessant Buffett rumors, the shorting ban (which was also traded on in front of the announcement by an afternoon) and more.
Not one of these has led to a formal investigation, yet all trades are trivially traceable. If the government gave a good damn about prosecuting this sort of information leak and front-running, all of which is illegal by the way, the records do exist. All they have to do is look.
This sort of corrosive and pervasive scam destroys confidence in our capital markets. I am convinced that a huge part of the reason that we had the collapse we did in 2008 and early 2009 - the reason it was so violent and essentially impossible to control - was that confidence in the markets had been destroyed by months of outrageously unlawful conduct in this regard.
When the "triggering thing" happened - Lehman - it just all came apart at once, since nobody trusted anything any more.
What makes anyone believe this is over?
The scam machine is still running. The rumor-mongers are still plying their wares, getting in front of the alleged news (even though it is repeatedly faked) and stealing investors money - time and time again.
We have learned nothing. Our law enforcement agencies and politicians have not only learned nothing, they have put in place the very same instabilities that led to the collapse last time.
It will happen again, and probably sooner than anyone expects.
Our SEC is a joke and the international regulators are even worse. We have no desire among those people to investigate the outrageous actions of these scam-meisters and lock them up. We should, but we don't.
Your memory should be good enough to remember what happened the last time. It should also be good enough to remember why it happened the last time.
We've changed nothing.
Are you insane enough to believe that the outcome - having done the same thing - will in fact be different?
Watch as a Department of Defense employee is caught on tape selling military secrets to a Chinese spy. 60 Minutes' Scott Pelley reports, Sunday, Feb. 28, 7 p.m. ET/PT. (click above)
The tape shows a Chinese spy obtaining the list of weapons that we intend to sell to Taiwan. This, of course is rather topical, seeing that this little dust-up just happened - remember?
BEIJING (Reuters) - Senior Chinese military officers have proposed that their country boost defense spending, adjust PLA deployments, and possibly sell some U.S. bonds to punish Washington for its latest round of arms sales to Taiwan.
WHY IS IT THAT WE, THE PEOPLE OF THIS NATION, PUT UP WITH THIS CRAP?
I'm not willing to pay down one damn nickel of the so-called "debt" that China holds. Not one nickel.
They can blow me.
All of them.
Espionage with your "best friends" and "trading partners" eh? With those that you claim to have an "important relationship" with?
I think not.
I think it's war, and it's time we recognize it for what it is.
In fact, I'm so sure it's war that I think we, the people of this country, should demand that our Treasury Department tell the Chinese to stick their bonds up their ass. All of them, including those they're buying through British banks.
And if Treasury won't, and President Obama won't, that's fine.
We should refuse to buy anything that comes from China.
Yes, I know that's hard these days. You know what? I don't care.
These people are not our friends. They are murderous thugs who are stealing our military secrets - so they can use that information to point weapons at us. Terrible weapons. Nuclear weapons.
And we're giving them the money and the power to do it every time we go to WalMart and buy more of their Chinese-made crap.
I say f^#k no to that.
You should say it too.
We should all demand that our government say no, or we'll say no for them to Chinese products and we'll say no TO them - the politicians directly - in November.
It's that simple.
When you owe the bank $10,000 you have a problem. We owe them $2 trillion dollars. As a consequence the problem is theirs and the solution ours - tear those bonds up, declare 'em worthless with the stroke of a pen.
Do it Washington - or we boycott Chinese products and do it for you.
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