Author Archives: Lila

Free Market for You, Fixed Market for Them

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Reuters: – “American International Group (AIG.N), is prepared to ask the U.S. Federal Reserve to relax rules on its $60 billion-plus disposals program to allow bidders to use a greater proportion of shares to pay for its assets, the Financial Times said.”

Comment: 

Talk about situational ethics…Do you think you can retroactively change the rules to suit yourself? Try that with the IRS, or your credit company, or the traffic cops, or with your doctor or lawyer.

But the remedy for people at the top finegling the system is not Gimme A Fix Too from everyone else, though that’s what the anti-market mavens will tell you…..

The remedy is: Unfix It For Them.

AIG’s taking a hit? Tough.

Criminal sanctions, not just civil, should be levied on financial criminals.

Change under Barack Obama

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“When America’s new leader of “change” was informed of Israel’s massive air attack on the Gaza Ghetto, an area of 139 square miles where Israel confines 1.4 million Arabs and tightly controls the inflow of all resources–food, medicine, water, energy–America’s president-elect Obama had “no comment.” According to the Jerusalem Post ( December 26), “at 11:30 a.m., more than 50 fighter jets and attack helicopters swept into Gazan airspace and dropped more than 100 bombs on 50 targets. . . . Thirty minutes later, a second wave of 60 jets and helicopters struck at 60 targets . . . More than 170 targets were hit by IAF aircraft throughout the day. At least 230 Gazans were killed and over 780 were wounded . . .”

Paul Craig Roberts in Counterpunch

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… 

Consumer Confidence At All Time Low

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“The Conference Board‘s Consumer Confidence Index fell to 38 in December from a revised 44.7 in November. Economists surveyed by Thomson Reuters had expected the index to rise incrementally to 45.

The separate Present Situation index, which measures how respondents feel about business conditions and employment prospects, fell to 29.4 in December from 42.3 in November. It is now close to levels last seen after the 1990-1991 recession…”

That’s from AP.

Safe haven Buying Rises on Israeli Attack on Gaza

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Gold needs to fall below $830 or to beak $865 to get out of its trading range, which is fairly wide ($35).

It’s up today, trading around $875-880 on news of the the Israeli attack on Hamas Gaza ( I corrected this in response to a thoughtful criticism). The volume of trade is light (as it was on December 26, Friday) and more volatile than normal. We will see at the close of the half-day whether it’s likely to move to the $885-$900 zone.

Otherwise, it could have put in a top (short-term) after its recent run up.

If so, we could go through support and  back under $820 and even $810.

That’s short term. Longer term, fundamentals are strong.

Meanwhile, confirming that investors are still most worried about the return OF their money, rather than ON it (to quote some wag), the Swiss franc shot up further, even though the Swiss economy seems to be contracting, according to recent financial news.

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.