Category Archives: Finance

Global Games: World Markets Contracting

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From Reuters: 

“For Chinese policymakers worried about social stability the most alarming news may have been the employment sub-index, which showed factories shedding jobs at the fastest pace on record.

Russia’s PMI showed a contraction in manufacturing deeper than the slump during its 1998 financial crisis.

In India, factories cut jobs for the first time in the survey’s 3- year history to reduce costs. The central bank slashed its two key short-term interest rates by 100 basis points to try to stimulate the economy.

In all three countries, factories reported slumping export orders with recession chilling demand in their largest markets — the United States, Japan and Europe.”

and outside BRIC, other world markets are struggling:

” South Korea, which ships a fifth of its exports to China, said export growth this year would be about 1 percent, the weakest since 2001.

Singapore’s government cut its economic forecast to a range between a decline of 2 percent and growth of 1 percent in 2009. Citigroup said that forecast was still too optimistic.

“If we are correct, 2009 will mark the most severe recession in Singapore’s history, surpassing the Asian Financial Crisis and the 2001 tech recession,” said Citigroup economist Kit Wei Zheng.

There were also signs of the slowdown biting in Africa, where some had hoped their less developed economies would be more isolated.

Tanzania cut growth forecasts and put off plans for a sovereign bond. Mauritius cut its 2009 growth forecast, fearing the global impact on its textile factories and the number of tourists visiting its Indian Ocean island beaches. …”

Comment:

That’s the end of “decoupling,” the theory that emerging markets, especially BRIC (Brazil, Russia, India and China) would decouple from a slowdown in Europe and the US.  Right now, they seem to be taking a bigger hit than what the “decouplers” anticipated.

On the other hand, it would be foolish to rush to the conclusion that a global slow-down will work itself out in the same way across the board. Export dependency varies, and in each country the domestic market has a different relationship to the export sector. Singapore, for instance, is more dependent on export demand than India.

Full disclosure: I have a very small holding in the Malaysia country ETF  (EWM) and it  is down about 30%.  MTE (Mahanagar Telecom), the only Indian stock I hold is down about 40%. But my global agricultural and water funds are down only 2% and 3 % each, giving me a total loss of under 5% – mainly from having tried to trade the GLD ETF.

(And, had I not been blogging, I would probably have sold those at the right time too. So, you dear reader, should not gripe too much at me, since doing my public duty at this blog is actually costing me. I daresay, I shall have to look to the Pearly Gates for any reward…unless they’ve been hit too…).

The Washington Post Spins the AIG Story

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Just came across this, since I was out of the country in October: 

Here is The Washington Post covering the story about AIG and the credit default swaps that underlay the crash in October, acting as though they were the first ones on it. No mention of the dozens of people in the alternative press, and in alternative investment newsletters and offshore news, who have been writing about this for years!

Read  The Crash: What Went Wrong and then go and look at my pieces at Lew Rockwell about two months ago, including Three Card Capitalists (October 1, 2008)

Putting Lipstick on an AIG  (September 19) and The Paulson Putsch. (September 25)

One of them, the more “leftish” sounding one, got linked a lot. The other two, more “rightleaning”, hardly got linked though they got passed around through email and fax among some southern Republicans with political connections, and I got a lot of private email (and some public). I swear even Newt Gingrich sounded like he was chanelling it the next day on TV when he suddenly started calling Paulson un-American, after praising him just a day or so before.

Now notice how the Post has slanted the pieces to make Rubin (Obama’s team has a quota of Rubin clones) look like the “good guy” while scrupulously avoiding calling him one of the good guys outright. Even the Post couldn’t go that far,  since after all Rubin is being sued – presumably not for his goodness – and people who follow these things have no great opinion of him at all.

Then notice the book that the Post recommends people read –   Richard Bookstaber’s “A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation” which is from the industry itself. Naturally, the “machine” is blamed. The structure. The way things work.  

Not that I dislike Bookstaber’s book, I don’t. Here is an excellent review of it, by the way. 

Bookstaber is right about risk management too.

But risk management is not the whole story. You can’t just look at structures and techniques. You have to look at who’s behind them.

You don’t want to demonize anyone, true. But events are created by actions taken by individuals, and if you don’t look at them like that,  you don’t really understand what’s happening.

This is the problem (for me) with a lot of socialist analysis. It is heartfelt, well meant but analytically weak, because the objects of the analysis are not units in a calculation or cogs in a machine. They are human beings, organic, dynamic, opaque creatures.  And the structures we like to analyze are only “instantiated” in them… as a social theorist like Anthony Giddens might put it….They have no separate existence apart from them.

That’s all for now, while I go and do some research into where else I can put my little stash of winter nuts before the bear eats it all up… 

Apparent Suicide of Madoff Fund Manager, De La Villehuchet

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In ABC’s report on the apparent suicide of La Villehuchet,  I find this:

“European fund managers who knew de La Villehuchet described him to ABCNews.com as a man who inspired “a lot of respect, honour, humanity, kindness and generosity.” They said Villehuchet had a strong belief in Madoff and had not only committed his own money to Madoff, but did so with 150 percent leverage — in effect, his potential losses were greater than his actual wealth.

Access International’s LUXALPHA SICAV-American Selection fund invested solely with Madoff, and is one of several large funds that has been the subject of the ongoing federal investigation into what prompted them to place large amounts of client money with Madoff despite red flags that had been raised for well over a year by some inside the hedge fund community. The fund had at least $1.4 billion and perhaps closer to $2 billion in money under management, placing it in the top tier of funds that appear to have lost most if not all of their investment in the scandal. …”

Comment:

The most interesting parts of this to me are:

1. 150% leverage as late as this year.

2. De La Villehuchet took over Lux-Alpha, the fund invested in Madoff, only recently.

3. Lux Alpha had been set up by banking giant UBS.

4. UBS has been the hardest hit European bank on subprime, and was under investigation.

There are many more dots connecting in my mind that I’d prefer not to put up on my website now.

I was among the first to note that Madoff couldn’t have been alone.

I will now go on record and say that what I’ve read so far indicates a very extensive web of associates, some at the highest levels of finance and government.

And as a bonus Christmas present, I will add that there is likely some connection to money laundering……

Financial Follies: Which Cookies and Which Jar?

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Sorry. I must be stupid. I still don’t get it.

Bernie Madoff started a fund back in the 1970s (Correction, 1960).

OK. This fund took people’s money and held it, giving them returns of around 10-17% (or 20%), according to different reports. People knew they got this return because they saw the statements.

The statements, which I posted earlier, were fake, but noone could tell. The returns, some now say, were suspicious, but at least one financial algorithm (or “metric”…how’s that?…that’s a nice trendy word meaning nothing much more than measurement) apparently didn’t catch the fraud, if it was that.

There were other odd things. The fund sold its assets at the end of each year and bought them back the next to avoid disclosing what it owned. You could get your statements in the mail but not on the net. Odd, but you trusted the guy and said nothing.

So far so good.

Through savvy networking and good PR as a philanthropist, Madoff played off his SEC/Nasdaq connections to sell this confidence trick to a huge number – some 4000 – clients from the creme de la creme of the NY, Florida, and European money worlds.

Now, here’s the problem. That might make sense over 2, 3, or even 5 years. But apparently, this went on for 48 years, without triggering anything more than cursory investigation.

That I don’t understand. Weren’t there several collapses of the stock market and the economy in that period? How does a Ponzi scheme survive repeated deflations in asset values? Don’t people come out of the woodwork during a crash asking for their money back?
And how do we know that everyone now claiming a loss actually did lose their money with Madoff? If his books are so unreliable, how would anyone know anyway? What if some of them made money with him, got rid of it, and are now claiming a loss? Or are exaggerating their losses. That would help them get government funds or collect on insurance or win legal remedies. Has anyone thought of that?

(Sorry to be so suspicious and without offense to those who really did get hurt).

If Madoff was so in bed with regulators, what’s to stop the regulators pouring over his books in private. What’s to stop them from cooking the books to create whatever appearance they want?

Suppose Madoff is only taking the fall for someone much bigger? And all this to-do is intended to throw dust in our eyes while some more complicated scheme is being put together? (Remember the so-called rescues we saw this summer and fall?)

Take this description in the Telegraph:

“The investors who have come forward – many of whom had no idea their money was being managed by Madoff due to the complex scheme he operated, by which certain funds fed into others – have so far claimed losses of $35 billion, still some $15 billion shy of the $50 billion total that Madoff is alleged to have mentioned to his two sons, Mark and Andrew. That alleged confession was triggered after investors whose fingers had been burnt by the financial crisis asked Madoff for their money back – they wanted $7 billion, but there was only $300 million in the bank. The system of sucking in new money to pay existing investors, which federal investigators allege had gone on since at least 2005, could not continue. Madoff’s group of companies is now under federal control, with investigators from the FBI, the Securities and Exchange Commission (SEC), and the US attorney-general’s office camped in the firm’s headquarters, the so-called “Lipstick Building”, poring through reams of paperwork… ”

Now, where did all that money go? Was it just the falling market? What about his trading returns? And that secret firm he also ran, which even his sons knew nothing about?

More here at Bloomberg:

In its 1992 lawsuit, the SEC claimed accountants Frank Avellino and Michael Bienes began raising money in 1962 and placing it with Madoff while promising investors returns of 13.5 percent to 20 percent, according to court documents obtained by Bloomberg. As of October 1992, their firm, Avellino & Bienes, had issued $441 million in unregistered notes to 3,200 people and entities, court papers say. They invested solely with Madoff, who opened his business in 1960.Avellino and Bienes, who were represented by Sorkin, agreed in November 1992 to shut down their business and reimburse clients. Lee Richards, the court-appointed trustee over Avellino & Bienes, hired auditors Price Waterhouse to scrutinize the books of the firm, which operated as an unregistered investment company, according to the SEC…”

Madoff Mess Hits Everyone: Fairfield Group Sold Madoff to Foreign Funds

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The Wall Street Journal.

“Over the past few years, Fairfield was successful selling in Europe, thanks to the ability of Mr. Noel’s sons-in-law to tap wealthy individuals and banks there. Andres Piedrahita, who married Mr. Noel’s eldest daughter, was particularly skilled at weaving a social network in Madrid and London, those who know the fund say.

In a presentation about 18 months ago, Mr. Piedrahita pitched a Madoff-related fund to a wealthy London individual investor, according to David Giampaolo, chief executive of Pi Capital, a money-management firm, who was invited by the investor to sit in on the presentation. Mr. Piedrahita stressed the fund’s years of steady and attractive performance. “The thing I remember hearing that I liked was the longevity and the consistency” of returns, Mr. Giampaolo said.

But he says the presentation was thin on details about the investment strategy. When pressed to articulate how the fund generated the performance, Mr. Giampaolo said, “There was no deep scientific or intellectual response.” The wealthy individual didn’t invest. A spokesman said Mr. Piedrahita wasn’t available for comment.

Still, banks on two continents offered investors souped-up versions of the Fairfield Sentry fund, designed for funds-of-funds clients and wealthy private-bank clients clamoring for consistent investment returns and access to Mr. Madoff. These products were backed by loans from banks including Banco Bilbao Vizcaya Argentaria SA and Nomura Holdings Inc., according to documents reviewed by The Wall Street Journal. These banks loaned money designed to amplify the gains of the Sentry funds. Nomura on Monday said its exposure to Mr. Madoff was about 27.5 billion yen, or about $304 million. A Nomura spokesman Thursday declined to comment further….”

Comment:

The WSJ is reporting that Walter Noel’s Fairfield Group, which actually had a former SEC officer on board, was the channel through which the Madoff fund was sold to a range of foreign investors looking for steady positive returns. Fairfield charged stiffly – 20% of the return plus 1% in fees – for what they claimed was their technical skill in analyzing/supervising the investments. In practice, they simply turned the fund over to Madoff.

The SEC official, Tucker, was at the Commission from 1970-1978. He left and went on to co-found Fairfield Group with Walter Noel, to whom he introduced Madoff in 1989. The firm was apparently a family-run outfit, like Madoff’s, in this case, with 4 sons-in-law of Noel (and Tucker) in charge.

Apparently, investigations in 2006 found no proof of fraud, but determined that Fairfield hadn’t properly disclosed its connection to Madoff.
The Times (UK) is reporting that Mary Schapiro, Barack Obama’s choice to head the SEC, picked one of Madoff’s sons, Mark, to serve on the board of the very division (the National Adjudicatory Council) that reviews disciplinary actions by the Financial Industry Regulatory Authority (FINRA), of which she is the current chief executive. (my emphasis)

And this:

” At the time of Mark Madoff’s appointment, Ms Schapiro was serving as president of the National Association of Securities Dealers (NASD), according to the Wall Street Journal, which was consolidated with the New York Stock Exchange Member Regulation in 2007 to form Finra. ”

The whole business is so peculiar and so irregular it boggles the mind that no one caught on. (Actually, someone did and sent tips to the SEC, which was why it looked at Madoff in 2006).

It’s clear where the problem lies:

Consolidation, Centralization, and Corruption

The three go together. The people who want to control and corrupt the process are usually the people pushing for consolidation and centralization. Without that, with local authorities, with inefficiencies between different markets, different regulatory environments, its hard to make changes, fiddle with books or do anything on a grand scale. The greater the degree of centralization, the more power in any one spot, the more the potential for that spot to be taken over by a cabal.

Financial Follies: Goldman Alum to Head CFTC

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“Obama to appoint Gary Gensler to lead Commodities Futures Trading Commission — AP.”

Gensler is a former undersecretary of the treasury and assistant secretary of the treasury.

Gensler is a Goldman Sachs alum and a Treasury man. Obama is putting one of the key figures in the Gold Cartel scheme into the top role at the CFTC. Talk about the fox guarding the henhouse!”

More by Bill Murphy of the Gold Anti-Trust Action Committee

Trader Psych: Incredible Dollar-Swissie Reversal

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“USDCHF – Recent US Dollar/Swiss Franc price action is a testament to the effectiveness of Speculative Sentiment Index-based currency forecasts. Forex trading crowds had remained heavily net-short the USD/CHF since July, and the pair went on to mount an impressive multi-month rally. Most recently, that same crowd capitulated and actually went net-long the USD/CHF near the 1.2000 mark. The US Dollar subsequently went on to post its biggest monthly loss against the Swiss Franc in history—incredible by any standards. Looking to very short-term trading, the crowd is currently net-short the pair, with short positions outnumbering longs by 1.08 to 1. Such a flip gives us reason to look for a reversal, but a sharp drop in open interest gives us little conviction in our forecast. Our forex trading signals previously went short the USD/CHF for sizeable profits, but the strategies now hold a weaker bias….”

– trader, David Rodriguez 

Comment:

This was quite a move up for the Franc and it shows why trading currencies in a regular (non-trading) account is hard to do.

I had planned to buy Swissie at the end of last week and then decided that the dip in the dollar from 86 – 83 on the Dollar Index had already priced in a Fed cut. So I held off, waiting to do it on Monday.

Then came Madoff. And on Tuesday, a Fed rate cut that was historic.

And as a result, from Monday to Wednesday, the dollar lost more than half the gains it made this fall. The Swissie shot up. A great trade on Friday looked almost risky by Wednesday. What if the Swissie fell back after that surge? Trader sentiment switched to shorting the dollar.

As if to confuse sentiment again, at Thursday close, the dollar had recovered some of its footing against the majors.

In Forex, trying to look for a bottom (as I was trying to do with the Swissie) takes just a little too much time for action that quick. Crowd sentiment out there is as volatile as it could possibly be.

Now the crucial thing is if GLD (the ETF, as a proxy for the spot price) can hold above 850 and the dollar over 80 by Friday close. If they do, a trend reversal of the pair will be confirmed technically.

Note: I am talking about GLD and the dollar as inversely correlated, once again. They had decoupled for a while but have returned to their inverse relationship recently.I don’t know how long that will last though. Not very long, I suspect. Notice that GLD is moving out of synch with other commodities. Oil, for instance, is down at 41/2 year lows. GLD’s move, in step with the Swissie, typified a rush to safety.

Propaganda Nation: Rubinomics and the Madoff Mess

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Notice how the Madoff scandal is being covered by the media. Madoff’s ethnicity is being played up. Frankly, it was not the first thing most people thought of. The first thing that came to my mind was “Ye gods! A Nasdaq chairman FAKED account statements for maybe 2 decades and no one noticed!”

However, leave it to the mainstream media to drag anti-Semitism into it and then try and deflect this imputed anti-Semitism by offering us outright fibs. The main targets of Madoff’s fraud were Jewish charities, is the suggestion. They were not. Even with the latest upward revision of the amount lost by Jewish charities, the main victims were foreign banks, like Santander and Medici, and American funds like Fairfield Group in Greenwich, Connecticut.

Also, unnoticed went the filing of a lawsuit against Robert Rubin, former chairman of Citigroup, for defrauding shareholders. The suit calls it a type of Ponzi scheme.

The media coverage of Madoff distracts from the fact that subprime debt itself was the mother-of-all-Ponzi schemes, and ripped off investors all over the world.

And the culprits, members in good standing of the Banking Mafia of Sachs & Citi et. al., are far bigger than Madoff…..

Market Manipulation: Whither the Dollar…and Whence

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From a comment at Follow the Money blog on the dollar’s sharp move up this fall, during the crisis:

“One of the interesting patterns in the events of this year is US banks using margin calls and collateral liquidations to export deflation globally. They appear to coordinate the margin calls, for example, the prime brokers MS, GS and JPM all raised margin by more than double on thousands of hedge funds on 1-2 October while they were simultaneously railroading the TARP through the House. Margin was due two weeks later, coinciding with a massive sell off in quality assets worldwide, especially gold and oil.

The result is deflation overseas much worse than in the US, particularly to emerging economies where liquidity was more concentrated in the few big players and the hedge fund/private equity funds.

As they have forced sell-offs abroad, they repatriate the margin or collateral proceeds, driving up the dollar and inflating the relative performance of US assets.

Jobbing backwards, it was clear this margin deleveraging occurred in January, March and October – at the very least. As prime brokerage is largely unregulated and data is unreported, this happened outside the normal visibility of the markets.

It would be interesting to know how closely involved Geithner and Paulson are in these margin calls.

It will also be interesting to watch what happens when the deleveraging hits its limit, as the dollar will then be much more difficult to fluff….”

Comment: 

Looks like the dollar is on its way down now.

Global Games: Will the Indian Market Be Affected?

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Some argue that the Indian market will be only temporarily affected by the financial crisis because Indian banks had no exposure to the sub-prime crisis.

But it isn’t so clear-cut.

As to the banks:

In the first place, at least one affected bank, HSBC, the world’s fourth biggest bank, with a market value of more than $200 billion, is invested in the Indian market.

HSBC ended the year up by 21%, apparently because the $17 b loss it took on subprime in the US (98% loss) was made up by its gains in Asia. But HSBC has had other problems, including litigation rising from the subprime hit and another hit from its exposure to Madoff’s fund.  What’s more, Knight Vinke, the activist investor based in Monaco, claims that HSBC”s losses would be twice as high as it admits to if it followed the same accounting rules as its rivals. (Shades of G Sax).

HSBC, headed by Naina Lal Kidwai (more on her at my blog in a post on Indian women business leaders), is also focusing rather heavily on India, with plans to penetrate the insurance and investment bank business.

Looks like it doesn’t have than much else profitable about its other ventures.

HSBC isn’t the only one.

There are a number of other banks described as actively involved in or interested in the Indian market – among them, Fullerton India and Stanchart, according to this piece in Sept 2007 in The Business Standard.

In the second place, subprime exposure isn’t easily ascertained at all, since the risk is separated into different levels and rebundled in rather opaque ways.

Thirdly, we cannot know for sure that there is no corruption involved when the Indian government denies that any banks have exposure.

Fourthly, Goldman Sachs and other banks and funds have been investing quite a bit in the Indian commercial market, so there might be an exposure there, apart from what is or is not present in the residential real estate market,

Besides the banks, there are other economic factors:

Foreign Institutional investors (FII) are only one part of the picture. So the fact that they have been regulated or may have played a smaller role than a worst case scenario doesn’t dispose of the problem of contagion.

World markets affect India in other ways, as Susan Thomas points out in the Economic Times.

1. Many Indian companies are multinationals themselves and produce in and export to foreign countries.

2. Many large Indian companies, like Infosys, are heavily dependent on exports. When they are affected by world markets, they pass on the volatility to their customers. Often this influence is disguised by the existence of intermediary companies.

3. Producer prices tend toward parity across the globe, thus affecting the industries buying products and those industries’ share prices.

No surprise then that Indian industrial production has fallen for the first time since 1992, a predictable consequence of the flight of foreign investors from the stock market, dampening of industrial production, fall in exports and decline in domestic demand… among other things….

Notably, India stock exchanges was the worst performing of the emerging market exchanges in February 2007, a situation quite different from the drop in 2006.

On the plus side: fundamentals remain good and liquidity is strong

But with the worsening news on all fronts, and the latest terror (?) attack in Mumbai, the hope is a little tinged with fear.