Category Archives: Finance

Felix Salmon Gets It Right On Short-Selling

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Felix Salmon gets it right about short-selling this time round, at Seeking Alpha: (December 31):

“It’s not just short-sellers, either: most financial professionals are essentially parasitical on people who genuinely add value in the real world. Old-fashioned lending is important, and I’d say that stock markets in general also count as a positive financial innovation, since they make it vastly easier for companies to raise equity capital. But in my ideal world, people working for real companies like Kodak would make more money, in general, than people working for more parasitical financial-services companies. The fact that it’s the other way around worries me. While finance may or may not be good at the efficient allocation of capital, it seems to be positively bad when it comes to the efficient allocation of the labor of intelligent and perspicacious individuals.” Continue reading →

DTCC Board Stuffed With Kleptocrat Banks/Funds

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The DTCC (Depository Trust and Clearing Corporation) is the largest depository in the world, and, along with its subsidiaries, the place where all transactions in equities, money market funds, corporate and muni bonds, MBSs and derivatives are cleared and settled.  Activists have been demanding detailed release of trades which haven’t been settled or have failed to deliver (FTD), because of the obvious potential for manipulation, A glance at the board of directors, which consists of leading figures from the banks and funds, many of whom profited hugely from the government bail-out, shows that concern is amply warranted.

From Citizen Economists:

DTCC BOARD OF DIRECTORS

The DTCC’s board includes 20 directors.

Art Certosimo, Senior Executive VP, Bank of New York Mellon
Norman Malo, President and CEO, National Financial Services LLC; Fidelity Investments
Stephen P Casper, Partner, Vastardis Capital
Gerald A. Beeson, Senior Managing Director, COO. Citadel Investment Group
Donald F. Donahue, Chairman and CEO, DTCC
William B. Airnetti, President and COO, DTCC
J. Charles Cardona,  CEO Bank of New York Mellon – Cash Investment Strategies,  President of the Dreyfus Corporation
Randolph L. Cowen, Co-Chief Administrative Officer, Goldman Sachs Group Inc
Norman Eaker, CAO, Edward Jones
Timothy J. Theriault, President – Corporate & Institutional Services, Northern Trust Company
Neeraj Sahai, Managing Director and Global Business Head, Securities and Fund Services, Citi
Gerard La Rocca, Chief Administrative Officer, Americas Barclays Capital
David A. Weisbrod, Managing Director and Risk Executive, JP Morgan Chase Bank
Stephen Luparellyo, Vice Chairman and Senior Executive Vice President of Regulatory Operations, FINRA
Mark Alexander, Managing Director, Global Wealth and Investment Management – Bank of America, Merrill Lynch, Head of Technology Operations, Broadcort Clearing
Ronald Purpora, ICAP Securities USA LLP
Robert Kaplan, Executive Vice President, State Street Bank and Trust Company
Michele Trogni, Managing Direcotr and Global Head of Operations, UBS Investment Bank
Ian Lowitt, Administrative Officer, Lehman Brother

Warren Buffett To Promote Paulson Book

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Now, we don´t want to read too much into this announcement, but, really, promoting Paulson´s book? What´s Buffett going to say?

I really really like that chapter where Hank had to take over the US government.…you know, after he pushed Bear Stearns and Lehman over with the help of his  hedge-fund buddies…and all but nationalized housing.

Or

Gee, Hank´s into that cap-and-trade collectivist boondoggle that just got outed as a total rip-off  and a fraud made up by climate change fanatics but hey, give the guy a break, will ya? We´re all capitalists here…..you know, like, state capitalists..wazza big deal?

Or

Yeah, I know. Vanity Fair, that bastion of free markets and free minds, already did its bit for Hank´s place in history when it got down on its knees and..um.. blew…up.. the guy into some kind of I´m-taking-on-the-slings-and-arrows-for-the-greater-good-profile-in-courage long before me, and yeah, Bethany  did her bit for Hank too.. but every little effort counts…

I´ve had my doubts about Buffett´s involvement in the bail-out.

This doesn´t make them go away…

Prem Watsa On The Uptick Rule

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Prem Watsa of Fairfax Financial –  one of several targets of short-selling attacks – in an interview with financial editor Diane Francis in the National Post:

“Q What stock market rules contributed to the meltdown?

A Eliminating the uptick rule [can only short on upticks in stock prices] was a mistake and so is short selling without borrowing the stock first. The ban on shorting financial institutions is lifted again and the SEC is debating whether to bring back the uptick rule again. What we need more of is transparency in all markets, including with respect to shorting and derivatives.

Q What of the role of boards of directors?

A In a bubble it’s difficult for boards of directors. Compensation should be long term. It should be stock-based and not cash. Our company’s compensation system is focused on the bottom line, not top line, and is long term. The Romans built strong bridges because their engineers had to stand under them as the army crossed them for the first time. Responsibility brings better results and aligned interest with partners.”

My Comment:

Watsa is an interesting figure to listen to on the financial crisis. Born in Hyderabad and educated in Chemical Engineering at the Indian Institute of Technology, he is the founder, CEO, and chairman of Toronto based Fairfax Financial, as well as a director and member of the risk committee at ICICI Bank in India. He’s been called India’s Warren Buffett and he did handsomely for Fairfax investors, turning shareholder equity from $2 billion in 2006 to $6.5 billion in 2009 by betting against credit default swaps.

Besides specific rules like the uptick rule, he cites the emphasis on ratings (versus due diligence or prudent risk management) and an increasingly short-term bias in the way companies, shareholders, and money managers act.

What does that amount to? A concern with the way things look, rather than the underlying reality.

It was the focus on labels and not reality that did the capital markets in.  At least, that’s my generalization

Zerohedge On Banning Credit Default Swaps

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Zerohedge has a technical discussion of why hedge fund manager David Einhorn’s call to ban Credit Default Swaps is essentially a call to dismantle the entire fiat money system. Some of the details elude me, as they’re very technical, but the rest seems right to me. There’s no inherent difference between a credit default swap and, say, an interest rate swap, of which there are many more. So Einhorn’s demand is in effect a demand to ban all derivatives…

“Remember the liquidity pyramid?

As the graphic shows, derivatives account for 1,000% of world GDP, in essence allowing the world to believe fiat money is worth something only courtesy of financial sleight of hand which involved derivatives and securitizations. Yet all those calling for an end to CDS also have to realize that due to CDS intertwined nature, the world fiat system would need to do away with all derivatives (not just CDS), and when you do that you basically eliminate the other hybrid asset classes: securitizations being chief among them. What this would leave us with is a liquidity pyramid which ends with bank loans, which are much more manageable and whose risk can be controlled. It would also leave the world with a fiat currency system, which would lose about 10x of its value overnight, thereby leading to an instantaneous and global unwind of fiat money, and rolling waves of domestically denominated hyperinflation. A spectacular race to the bottom of the asset pyramid. And who will rather commit suicide than see that happen: why the Federal Reserve of course.

Which brings us full circle: an attack on CDS is an attack on excess liquidity, which is an attack on the global asset/liability imbalance (as world GDP and otherwise output has no chance of catching up with the liquidity that is currently available), which is an attack on fiat money, which is an attack on the perpetually low price of gold (because if and when derivatives and securitizations are done away with and tangible assets regain their true value, gold would go up by at least the same magnitude that fiat currencies are devalued), which is an attack on the heart of our broken financial system itself, and, an attack on the Federal Reserve, the Fractional and Central Banking System in principle. Well done David.

We hope Einhorn is successful in bringing more people to understand not just what the risk implications of CDS are (while also demonstrating the positive value that they do in fact provide in a rigged and broken capital market), but also what the underlying thematic subject of his attack really is: a busted fiat system. In essence, David believes in a fresh start. So do we, because on a long enough timeline…”

My Comment

Just to make it clear – I am myself not in favor of banning all derivatives. Why? Not because I think they´re profound innovations..or vitally necessary. But I think it´s the wrong way to go about tackling the problem. Banning one set of financial instruments will only prevent the smaller players from using them. The largest and best connected players will game the ban in some way, or make use of other sorts of compensating structures.  A better way would be to undo the fiat money system altogether…

So my agreementis with Zerohedge´s assessment of the situation and not necessarily with Einhorn´s recommendation on that point.

Besides, Einhorn, who made his money off of CDS´s, is an odd person to be pushing a ban.

SEC’s Own Accounting Is Deficient

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Apparently, the SEC, top regulator of financial fraud, isn’t up to snuff keeping its own financial books…
We don’t say it’s cooking its books, but it sure looks like if someone wanted, they could cook them quite easily, according to this report at law.com:

“The GAO found that the SEC “did not have effective internal control over its financial reporting as of Sept. 30, 2009.”
As part of its mission, the SEC is charged with enforcing strict financial disclosure rules for public companies. Apparently, it is less adept at policing itself.
For example, the GAO reported that SEC’s general ledger system allows unauthorized personnel to view, manipulate or destroy data, and that “serious unauthorized activity” may remain undetected.
Until the SEC fixes these problems, the GAO found, the SEC can’t be sure “1) its financial statements, taken as a whole, are fairly stated; 2) the information the SEC relies on to make decisions on a daily basis is accurate, complete, and timely; and 3) sensitive data and financial information are appropriately safeguarded.”
Nor could the SEC “provide evidence that it monitored controls over its payroll exception reports to ensure payroll transactions were recorded accurately and timely.”
While the GAO did credit the SEC with producing statements that were “fairly stated in all material respects,” it flagged “six significant deficiencies” for FY 2008 and 2009.

The six areas are:

• information security;
• financial reporting process;
• fund balance with Treasury;
• registrant deposits;
• budgetary resources;

My Comment:

Translated, those six problem areas amount to this:
No one can really be sure if or when

1. Someone steals information from the SEC
2. Something is wrong in the SEC’s accounts
3. How much money the SEC has with the Treasury
4. How much money the SEC takes in
5. How the SEC is doing on an ongoing basis

Chew on that…

IPCC Chief Pachauri Central To Cap-and-Trade Scam

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From Mish Shedlock:

“The crux of the scheme is this: European steelmakers have threatened to leave the EU for India, eliminating the jobs of thousands of workers in the process, unless the EU grants the steelmakers free carbon credits worth hundreds of millions of dollars.

Eurofer, a European trade group, is at the center of the scheme. The web of the plot, however, weaves in not only several companies, but also the United Nations’ climate change chief:

* Among its members, Eurofer represents two EU steelmakers, Corus Redcar and ArcelorMittal, each of which has ties to India as well as to Rajendra K. Pachauri, the Indian industrial engineer who has been chairman of the U.N. Intergovernmental Panel on Climate Change, or IPCC, since 2002.

* Eurofer appears to have coordinated a threat to the European Union Greenhouse Gas Emission Trading System that its steelmakers would move their operations from the EU to India unless the EU cap-and-trade exchange issued them – at no cost – carbon emissions permits worth hundreds of millions of dollars.

* Once the bureaucrats in Brussels acquiesced, Corus Redcar and ArcelorMittal maneuvered to cash in windfall profits from the EU carbon permits given them at no cost.

* Additionally, Corus Redcar has now announced a decision to close operations in Great Britain nonetheless and relocate its steelmaking activities to India in order to gain additional U.N. carbon credits.

Ironically, EU and U.N. officials who might have thought requiring cap-and-trade permits would operate as “protection racket” in which EU companies need to buy carbon credits to continue operations, have now found themselves on the losing end of the reverse scheme.

In the final analysis, the winners are the European Union corporations willing to play hardball with the European Union Greenhouse Gas Emission Trading System, and the losers are the EU middle class workers that are held hostage in the scheme.”

Dan Denning On Dubai, Copenhagen, And The Stock Market

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Dan Denning, author of “Bull Hunter” (Wiley, 2005), in the Daily Reckoning (Australia):

“The S&P 500 hit a 14-month high overnight. The conventional wisdom is that two news events are responsible. This is probably wrong. But let’s look at both events anyway and see what happened.

The first is that Abu Dhabi extended a $10 billion in financing to debt-distressed Dubai. Hossanah! Remember, Dubai is not Lehman. It’s Bear Stearns. It’s merely the reminder that there are lot of leveraged investors in the world who’ve used borrowed money to buy assets that aren’t very productive. They’ll get theirs soon enough.

The second bullish item is that ExxonMobil (NYSE:XOM) made a US$41 billion all stock bid for Houston-based natural gas company XTO. This sent Exxon shares down 4.4%. Thus the Dow’s rally was a bit tepid (XOM is a Dow component)……

Exxon is either getting a bigger foot in the U.S. natural gas market or hedging against cap-and-trade legislation, or both. We vote for both. No one is in a better position to know about the constraints on global oil production and discovery of new reserves than a major company like Exxon. And Exxon has seen firsthand that unconventional natural gas can be a lucrative little market.

But are those two bits of news really enough to send the market higher? Probably not. Who knows why the market goes higher? It does what it does. There’s an alternative explanation.

The alternative explanation is that the Copenhagen climate talks look like they’re collapsing into confusion and President Obama’s legislative agenda is in tatters. The private sector absolutely loves this…..

Good policy? Bad policy? Who knows? All we know is that the more uncertainty you introduce into the markets, the more conservative and defensive investors are going to get……

That’s not to say that a deal won’t come out of Copenhagen. Maybe the planet will be saved. Or maybe Copenhagen is the sell signal for global warming as a big idea/moral issue with which to bash the public. But either way, we reckon the stock market actually likes the idea that no climate deal is imminent and that healthcare legislation in the U.S. Senate can’t seem to get 60 votes.“

My Comment

Full disclosure: I worked for Agora two years ago. I receive no financial or other compensation ( trips, free food, passes to movies, restaurants, invites to exclusive seminars, commissions on real estate, insider deals etc. etc.) for mentioning them.  But, if you´re writing about financial contrarians, they´re the original ones ….

My own difficulties with and criticism of them do not – and should not – prevent me from correctly attributing and acknowledging their work in populariazing nearly all the main issues that are now being debated in the media. Certainly, it was through them, and through Lew Rockwell, and Mises, not through establishment media or their blogs that I received an education in Austrian economics (I should add that I was always instinctively oriented to it, from childhood on).

Having deleted my facebook account after the social media wrestling-match between the Wall Street media mob (and backers) and Deep Capture´s investigative team (and backers),  I am now content with actually writing emails or making phone calls to people I want to contact. Thankfully, there aren´t many I do.

SEC To Look At High-Frequency Trading and Naked Access

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From Reuters, a report shows sharp rise in “naked access” to markets after 2005:

“NEW YORK (Reuters) – A report says that 38 percent of all U.S. stock trading is now done by firms that have “naked sponsored access” to markets, the controversial trading practice said to imperil the marketplace, and which faces a regulatory crackdown.

Naked access gives trading firms, using brokers’ licenses, unfetted access to stock markets. The firms, usually high-frequency traders, are then able to shave microseconds from the time it takes to trade.

Aite Group, a Boston consultancy, found that naked access accounted for just 9 percent in 2005.

The U.S. Securities and Exchange Commission is set to make changes to naked access and less risky forms of so-called sponsored access, when it releases a document expected next month.

The document is also expected to look more generally at high-frequency trading — where proprietary trading firms, brokers, and others use algorithms to make markets and profit from narrow market inefficiency.”

Rick Ackerman On the Deflationary Argument

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From Rick Ackerman:

“Our grasp of deflation’s logic began with the 1976 book, The Coming Deflation, by the late C.V. Myers, and continued with Davidson and Rees-Mogg’s The Great Reckoning. Although Myers’ work was obviously premature, the concepts it emphasized are timeless, particularly this one: “Ultimately, every penny of very debt must be paid – if not by the borrower, than by the lender.”  This is the crux of the inflation vs. deflation debate, and because of the way Myers framed it, we’ve never had any doubt that the U.S. would eventually experience a catastrophic deflation. We were early in thinking the financial system would topple as a result of the allegedly “mild” recession of 1990-91 and its S&L crisis. In retrospect, it’s clear that we lacked the imagination to see that the huge amounts of Third World debt that threatened the global economy at the time were relative chump change compared to the galactic sums that Bush, Obama and the Federal Reserve have put into play in the last three years in hopes of saving the system.”

My Comment

I posted this to support my reiterated position that the recession  cannot possibly be corrected as simply as advocates of the stimulus programs like to argue.  It´s been in the making for more than a quarter of a century. Can a few months change everything so fast? I could be mistaken, but I don´t think so,…

I also posted the Ackerman piece to counter the establishment media spin that Nouriel Roubini was so much “ahead” of others in predicting the recession.

I call Roubini an establishment figure because of several things, including the fact that he does business with Larry Summers.  Here is Roubini warning about housing in 2006...

He himself said the earliest he predicted the housing crash was in July and August 2006.

But by then, even a layman, like yours truly had already done that, and done it earlier – July 2005

And I was, at least in part, drawing on my reading of Mises. org, Lew Rockwell, and The Daily Reckoning, when I wrote the piece…which is where they spotted me on the web, and offered me a gig.

(As I said, I´m always walking into synchronicities in my life..)

Compare that with what other experts were saying in 2005, which is,  there´s no housing bubble. That´s Ritholtz, by the way, who writes the excellent blog, The Big Picture (At least, Ritholtz also did say that housing was extended).

But then, in that same piece,  Ritholtz  also predicted that 2008 would be a good time to reenter the housing market. Oops. [Dec 12. On second thoughts,  maybe oops isn´t really warranted. Housing may not have bottomed out everywhere, but I´ll bet you could have picked up good bargains in a few places in 2008]

That shows that you can have very good number-crunching skills, but then miss some of the…..dare I say it?…big picture.…because the big picture has nothing to do with number-crunching but with perspective

And that takes a knowledge of history…. and not simply economic history either. It takes a broader knowledge of the world than professional money-managers usually have.

Meanwhile, compared to Austro-libertarians (see those cited above in Ackerman´s post), Roubini was some twenty-five years late in his analysis.

Yet the media studiously ignores Austrian theory and Austrian theorists (Mark Thornton, for example, called the housing bubble exactly on time and called gold $1200 back in 2005) and stamps approval on people who were either late or wrong…and turns to them for solutions.

Why is all that important? Because it shows the intellectual dishonesty that is at the heart of the corruption of the system.  Fraud and force go together, and for political and financial fraud to succeed, they need intellectual and academic fraud to cover their sins… and prep the soil.

Deep lack of trust of anyone who adheres to a rival political theory (or to a rival political party)…. and the arrogance of power…lead the establishment media to rewrite history…. and this intellectual dishonesty is the rag behind which the emperor (the state) hides his moral nudity.