If you didn’t catch the Frontline special, The Untouchables, on PBS last week, you should really check it out.
It’s another “What the heck is going on here?” investigation of the massive mortgage mania meltdown that begs the question: How have all of the big fish on Wall Street escaped the Justice Department’s hooks?
Lanny Breuer is the Assistant Attorney General for the Criminal Division of the Justice Department, and he’s the star of the The Untouchables. He shows the public that, basically, crime pays.
Lanny wasn’t cornered, or set up by Frontline like some Internet creep walking into a sting. He was interviewed of his own accord.
He wanted to defend his tenure at Justice and let the world know that he’s really trying, honest he is. He’s trying really hard.
He said, “Federal criminal cases are hard to bring – I have to prove that you had the specific intent to defraud… If we cannot establish that, then we can’t bring a criminal case.”
Make that tried, not trying. The day after the show aired, the Washington Post said the “division chief is stepping down.”
I haven’t seen any confirmation of that, but I did notice that some of the slickest six-figure (that’s per week) job postings at Wall Street’s biggest firms were taken down after the special aired.
Maybe those two things are connected. Maybe the common denominator is that crime does pay and that going after criminals and then not bringing criminal charges doesn’t pay – that is, until you switch sides.
We’ll just wait and see who drafts Lanny Breuer in the next episode of the Washington-to-Wall Street Lottery.
Then I got to thinking. No, I wasn’t thinking about getting one of those six-figure (per week) jobs.
I started thinking that Lanny has a point…
How do you prove intent?
If I approve you for a mortgage on a million-dollar McMansion, and you’re living in a refrigerator box, am I guilty of intending anything? Are you?
If I package your mortgage with a bunch of other similar, meticulously un-documented, thoroughly un-verified rags-to-riches loans, am I guilty of intending anything?
If I then sell those ticking time bombs to investors as AAA-rated securities – because the rating agency I paid rated it like the battery in my penlight – am I intending anything? Are the rating agencies?
You just don’t know. You can’t read my mind, or anyone else’s – including your own, for that matter.
Besides, I wasn’t the only one doing all those things. These activities were actually in job descriptions for a lot of those six-figure (per week) jobs on Wall Street. Nobody intended to blow themselves up, let alone the whole world.
It reminds me of that old Tower of Power song, It’s Not the Crime:
“It’s not the crime, and it’s not the thought. It’s not the deed, it’s if you get caught.”
These guys can’t get caught because there was no intent on their part – at least no intent that can be proven beyond the shadow of a doubt. I get that. It’s a law thing.
So, here’s the thing. We need new laws. We need laws that say, “If it walks like a duck and it talks like a duck, then it’s a duck.” And there’s no ducking out.
Maybe you can’t put people in jail for being ducks, but if they duck up, even if they didn’t intend to quack up anybody else, or the economy, or the world, to feather their own nests, then there should at least be laws that strip them of their ill-gotten gains.
After all, we should be able to prove they intended to make all that money.
As far as Wall Street goes, it sounds okay the way Tower of Power puts it:
“Ya know, the more things change, the more they stay the same…”
Some of you made harsh comments about last week’s story. I said that AIG should sue the U.S. government and the Fed for saving it when it could have (more likely would have) gone under during the peak of the crisis in 2008.
Insights & Indictments reader Darrell said, “Enough. This is the most vile piece… I have ever read. Those people SHOULD have been allowed to fail. FULL bankruptcy! To borrow from the taxpayers to compensate the “managers” who steered us into this mess with bonuses, and then whine [when] the terms of the loan were too extreme is beyond hypocritical. Capitalism without risk is NOT capitalism. Something you would do well to learn. I am unsubscribing form this service.”
Matt chimed in, “I’m with you. Acting like AIG is a victim of the big, mean Fed is preposterous. Maybe Shah and Alex Jones should take their baloney show on the road.”
I’m shattered. I’ve been put upon. I feel victimized by these comments. Where’s the safe harbor for journalists and bloggers? How can I be criticized so harshly and not feel victimized? Oh, the humanity!
Of course I’m kidding.
I subject myself to any and all comments when I exercise my freedom of speech. I keep a “Comments” section on my website so my readers can exercise their freedom of speech. I’m not a victim. I don’t need any protection from free speech. Free speech is a two-way street.
The point is that I’m sick of the victim mentality. Are you fed up yet?
AIG played the game. It was not a victim of the Fed or the Government.
Banks played the game. They weren’t the victims of regulation, the economy, or anything else.
No, they weren’t victims. And they didn’t create victims, either.
We’d like to see ourselves as their victims. It sure feels like that.
But, like I said, I’m sick of the victim mentality.
We let this happen. Maybe we didn’t see it all coming, so we’re not completely culpable. But, then again…
Darrell is right. “Capitalism without risk is not capitalism.” There are no victims in capitalism. People, businesses, companies all fail. None of them are victims.
The opportunity to try comes with the risk of failure. That’s the price.
You aren’t a victim if you fail in capitalism; you’re just a failed entrepreneur. Most of us get up, dust ourselves off and try again. We should be grateful for the opportunities available in this country.
That brings me back to AIG and the TBTF banks, or any other “protected class” of entrepreneurs. They have to be allowed to fail. A free society with America’s unique brand of capitalism demands failure when and where it is warranted.
I wanted AIG to sue the Government and the Fed to open up the window to the back-room dealings that create protected classes of businesses in the first place. I want Americans to understand how that happens, why, and just who pays who for their protection.
Our American economic quandary is partly the result of less competition, not more competition. There are plenty of examples, but AIG and the big banks are the most obvious.
No company – in any industry, ever – should be allowed to get so big that it dictates prices or that its failure threatens the public good.
We need to stop coddling “victims” of the economy or regulation or their own doing.
And we need to stop being victims ourselves.
WE THE PEOPLE have to demand that all too-big-to-fail entities get broken up, so that the only victims in our economy are those who don’t try to avail themselves of America’s opportunities.
The opening line of a December 11, 2012 New York Times editorial on federal and state authorities choosing not to indict HSBC for money laundering reads: “It is a dark day for the rule of law.” It may be a dark day for the rule of law, but it’s business as usual for the banks.
America’s heralded and frighteningly powerful Department of Justice, along with all of the not so heralded or frightening banking regulators, simply refused to prosecute Britain’s biggest bank out of fear of “collateral consequences.”
In other words, they’re “too big to prosecute.” That’s what Andrew Bailey, the chief executive-designate of the Prudential Regulation Authority, said about the usual deferred prosecution agreement that accompanied HSBC’s $1.9 billion fine. The Prudential Regulation Authority is set to replace the U.K.’s Financial Services Authority – the country’s current toothless watch dog.
It’s just another example of too big to fail and too big to jail.
Deferred prosecution agreements and hefty fines levied against the world’s TBTF banks have become commonplace. Still, there are relatively few criminal charges, just wrist-slapping, don’t-do-it-again fines and public spankings.
It is a dark day for the rule of law because the money cloak has effectively been cast over all things having to do with justice.
Let’s call it what it is: buying immunity.
The world’s biggest banks are too powerful, too intertwined, too “systemically important”, and just plain too rich to be challenged.
Regulatory “authorities”, along with the most powerful global policeman the world has ever known all shake in their boots when they have to apologize to their bankster masters for putting on a show for the public. But the law is the law and the law apparently needs publicly orchestrated payoffs.
Let’s put aside for the moment the corporations themselves and their extraordinary ability to make billions of dollars and laugh behind closed doors at having to pay fines that they can more than cover by the end of the following quarter…
Let’s put aside for the moment the fact that those fines are paid, not by insurance policies, not by executives or traders or any of the individuals that commit the crimes, but by shareholders…
And let’s put aside for the moment the fact that banks make so much money that they can buy off stupid shareholders by always offering dividends and stock buybacks (that’s like to luring them back to be set up and knocked down again like bowling pins).
We’ll put all of that aside, just for a moment, and talk about the guilty individuals…
No banking executives or traders or salesmen ever go to jail for the “systemic” banking crimes they commit. Don’t you think that’s part of the problem?
There is a travesty of justice as the laws are constantly trampled on by the individuals who commit these crimes – not the nameless, faceless corporate entities that publicly take the blame and pay the fines.
Now our moment is up. We can’t put aside anything that the banks do, as corporations, because that’s where the individuals hide.
Banks that are too big and too powerful and far too dangerous should be dismantled. There should be safety measures to ensure that the banks work for the betterment of the people who expect them to protect the fruits of their life’s labors and their business and entrepreneurial endeavors.
People should expect to be able to borrow their own money safely, while the banks put that money to work for the benefit of the depositors.
People should not have to worry about how they’re getting ripped off or how the banks are subjecting the global economy to crisis after crisis only to be bailed out again and again.
Here’s my Christmas wish, plain and simple: Prosecute all the criminals at all the banks and send the guilty parties to jail after they are stripped of their ill-gotten riches. Then break up all the too-big-to fail, too big too jail banks into bite-sized pieces that no watchdog would ever have trouble eating.
Is that too much to ask?
I’m leaving extra homemade cookies and a gallon of milk (in an ice bucket) right in front of my fireplace. If they’re gone on Tuesday morning, I’ll let you know.
Merry Christmas, Happy belated Hanukkah, and Happy Holidays to all of you good little boys and girls. As for the rest of you…you’re on your own.
Can we talk about unemployment in the U.S.? Can we talk about conspiracy theories?
I thought you’d say “yes.” I can almost hear you saying, “Hell yeah, bring it on!”
So, let’s have at it.
Let me say my piece, and then you chime in.
I’ll start by saying I don’t think there’s any conspiracy to manipulate the unemployment numbers.
You know, the numbers that came out on Friday and freaked everybody out.
Somehow, right before the election and right after President Obama fell flat on his face, after Mitt Romney knocked the champ (don’t get mad, he’s not my champ, he’s the champ because he’s the incumbent) down almost for a ten-count, the bloodied champ bounds off the canvas and stands on the ropes proclaiming victory over economic malaise because the unemployment rate fell below 8%.
Well, what’s freaky about the unemployment number, the U3 number, the most widely watched and reported measure of unemployment in the country, maybe even the world, is that it fell from 8.1% in August to 7.8% the September.
What’s got folks in an uproar (folks that aren’t so folksy when it comes to the champ) is that it looks pretty conspiratorial that unemployment hasn’t been below 8% in 43 months, not since Obama got into office. And all of a sudden it drops in August to 8.1% from July’s 8.3%, and far more freakily, drops to 7.8% (that’s below 8% for you non-math types) in September from 8.1% in August.
Before I give you my thoughts on why I don’t think there’s a conspiracy…
Okay, stop right there. I DO believe in conspiracies.
I believe that John Kennedy was assassinated in a coup’d'état in Dallas. Who did it and why? Figure it out, the facts are all there.
I believe that the Federal Reserve System is a front for the power, and of course, moneyed elites who run America for the benefit of its Club Fed members. The facts are all there.
Do I believe in other conspiracy theories? You bet I do. I just don’t believe in all of them, especially the ones that can’t be proved. Theories are fine, but give me some facts.
But I digress.
Does it smell like a conspiracy, some manipulation of the unemployment numbers that look so much better and may now aide Obama’s reelection campaign?
You bet it does.
The U3 number is calculated by means of two surveys. There’s the survey of businesses (sometimes called the “establishment”), and there’s the “household” survey of… duh, households.
The business survey for September wasn’t so hot. Manufacturing lost 16,000 jobs, which came on top of a loss of 22,000 manufacturing jobs in August. But there were some net gains in the service sector, notably in healthcare and education. And government (they’re a service outfit, right?) gained 10,000 jobs; sadly that’s the third monthly gain in a row for the govies.
The big gains came in the household survey. Are you ready conspiracy theorists? Some 873,000 jobs were filled in September in the household arena, which includes the self-employed and household workers.
What’s strange and almost conspiratorial is that in 2012 the average monthly gain in employment has been 146,000 (the average monthly gain in 2011 was 153,000). But September’s gain was 114,000. So where did the 873,000 new household jobs (of which 582,000 were part-time jobs) come from, or go, if the net gain was 114,000 for September? And, how fortunate was it that July and August’s numbers were adjusted upwards by another 86,000 jobs filled?
How did the unemployment rate drop from 8.1% to 7.8% about a month before the election?
The answers are in the wacky way the Bureau of Labor Statistics (a division of the Labor Department) calculates the numbers. Here’s a quick guide on how they come up with the Monthly Situation Report.
If you read what’s there you’ll see that the surveys are prone to all kinds of statistical and empirical vagaries.
Anyway, the U6 number didn’t move at all. That’s the number that counts part-time workers looking for full-time work as unemployed. And it’s still way too high.
No one seemed to say that that number was manipulated because it didn’t go down.
The reason I don’t believe the better than expected U3 number was the result of a conspiracy is because the BLS’s surveys are questionable to begin with and are pretty much always subsequently adjusted, sometimes by huge amounts.
The civil servants over at the BLS are long-time employees, so it’s not as if they come into office with each new administration and work for them.
Besides, if the BLS was to be manipulated it might be by its Commissioner, the one that the President appoints. And the commissioner now…well, there isn’t one. Obama hasn’t nominated one. The post is vacant.
Furthermore, the BLS shares all its data with private sector economists, analysts and academics. Is there anyone out there saying the numbers don’t add up?
For all the Obama haters that are calling the numbers a conspiracy, I say, come on, where are the facts, where is the proof?
It’s all so much political dynamite being exploded in a contentious race. But, I don’t believe that this time there’s a conspiracy.
And my last point is this…If I was going to orchestrate this kind of conspiracy I’d have done it several quarters ago. That way no one would look at new numbers as out of left field, and at unemployment falling below 8% right before the election and point a finger and say, “Ah-ha! Got ya!”
One by one the lights are being turned off in our “shining city on a hill.”
And Wall Street’s greedy hand prints are all over many of the darkened switchboxes.
Of course, politicians’ grubby, filthy fingerprints are everywhere too; but there isn’t enough cyberspace to launch into when discussing that black hole.
Besides, this e-letter specializes in Wall Street indictments.
You’ve heard about regulatory capture. I just wrote about its dark side in this space.
Regulatory capture is when regulators become captives of the individuals and firms they are supposed to be watching, regulating, and disciplining when they break the law.
“Industry capture” is beyond just regulatory capture.
Here’s what I mean…
Industry capture, which is unique to only a couple of American industries (hint: oil is the other one), is when the industry itself becomes so omnipotent, so all-consuming in our lives, so all-consuming of our money, so filthy rich that it buys and sells government officials, legislators, administrations, and presidents. So powerful that it has effectively captured the nation.
What isn’t spoken about, what isn’t generally seen (although most of you who comment here see it), is that Wall Street holds our nation captive.
Far from being mere unintended consequences on the road to facilitating capital formation and anchoring the capital markets, Wall Street turned a fairly straightforward one-way street leading to more, bigger, and better businesses across the country and the world into a superhighway with more twists and turns than a grand prix course.
And worse, there are no speed limits, and the roads go both ways at the same time, and the toll booths are manned by Armani-clad, Manolo Blanik-wearing bankers, traders and their flame-retardant and blame-retardant suit-wearing managers, and executives that tally the take.
How did an industry that accounted for between 5% to at most 7% of GDP in this country in the 1980s go to being responsible for between 17% and 20% of GDP by 2007?
That’s a lot of paper shuffling for some very lofty fees and fringe benefits.
But, of course, our GDP was made all the better and more stable and secure because of the Herculean efforts of all those banksters and pranksters… NOT!
We’ve been set up like bowling pins. Used like mailboxes in an alley where the Street’s bills pile up with public’s name on them, special-delivered at the direction of the new postmasters, Jamie D., Lloyd B., and Victor P., or DBP & Company for short.
Yeah DBP as in don’t bother pretending you don’t know we own your asses. Their mantra is “we make it rain, we bring the pain, we tally the gain, thank you again.”
Industry capture is a dead end for us, but a highway to riches for our captors.
If we’re ever going to get off this unlucky four-leaf clover interchange where we’re going round and round ending up at the same toll booths again and again, we’re going to have to fire most of the politicians in America, most of the bank executives, and most of the captured regulators.
And for that matter, the current president, who spoke a tough game but was himself captured by Wall Street money and fiddled with healthcare while Wall Street burned on.
Not that Mitt, whose glove is full of Wall Street money, will be any better. He might be worse.
Ron Paul, where in heaven’s name are you? Have you forsaken us?
By the way, I’m not leaving you hanging as to what the games are that are being played that turned Wall Street into easy street. Starting tomorrow in Money Morning, I’ll be detailing the cold, hard facts about what unintended consequences that have been planned all along.
That whole Knight Capital fiasco on Wednesday, when a software glitch caused them to flood the market with thousands of unintended orders, it ain’t exactly what you think it is.
Sure, they tripped over themselves in the dark pool where they were trying to compete.
But somewhat interestingly (okay, a LOT interestingly), the competitor that drove them to “upgrade” their trading software, which malfunctioned and caused them to actually bid-up share prices erroneously and then buy them at inflated prices, was none other than, wait for it…
The New York Stock Exchange.
That’s not the whole story, or even the good part. Oh, it gets better. A lot better.
Knight claimed a $440 million trading loss on Wednesday resulted from their computer glitches and sunk the company (at least for now; I’ll get to that).
Well, according to Nasdaq (this was on its site: nasdaq.com), it wasn’t a trading loss at all. Knight paid Goldman Sachs a $440 million fee (commission?) to take the errant shares Knight had bought on Wednesday morning off its hands.
Now, I don’t know what Goldman did with those shares, but my guess is they held most of them and sold them on Friday when the market soared a few hundred points. Of course, that’s not a “prop” trade. Knight is a customer of Goldman’s (it is now…).
But who cares?
Goldman Sachs ripped a customer for a $440 million fee, virtually bankrupting it in the process, flipped the shares it bought from Knight to “help” them (and first of all, probably overly hedged itself… as in enough to be net short… the large stake it holds in Knight’s convertible preferred) for a tidy profit, and then probably shorted the stock (before “helping” them, and themselves to their little fee) before the stock collapsed, then probably gave it its “lifeline” (that’s a guess, and I’m being sarcastic, but it’s possible). And maybe we’ll find out where that lifeline Knight got on Friday really came from) before buying a ton of Knight’s shares back on Friday before hearing (of course… before) that several big firms were looking at buying Knight.
What’s my point in the above LONG sentence? Who cares! That’s all business as usual at the Golden Vampire Sachs.
That’s after-the-fact stuff.
What’s more interesting is why all this happened in the first place.
Here’s what you probably don’t know…
Back in July, the NYSE got permission (from the SEC… oh, those guys are good) for a one-year pilot program. The name of the program is… wait for it… the “Retail Liquidity Program.”
Are you laughing? You will be.
The Retail Liquidity Program allows the NYSE to transact on the exchange (its Exchange), for the benefit of retail customers only, at better than posted prices.
That’s right. If you’re a retail investor and you buy or sell a stock on the NYSE, you might get a price better than the bid, if you’re selling, and a price better then the offer, if you’re buying.
Mind you, it’s not much. Maybe one-tenth of a cent. But hey, you know, on your 100 share orders, that adds up to a lot of money. Maybe now you can afford that Rolls Royce.
You didn’t know that, did you? And why should you? You wouldn’t because YOU don’t transact on the NYSE. YOU don’t send your orders anywhere.
Here’s what’s happening behind the scenes…
When you place an order with, say, TD Ameritrade, or Scottrade, or Fidelity, or E*Trade (these are all customers of Knight Capital; I’m getting to that), they “route” your orders to be executed against bids and offers elsewhere. Those bids and offers may be on the NYSE, at some bank (maybe Goldman Sachs), on some market-maker’s trading desk (like Knight Capital’s desk… they’re a market-maker, you know), or in some dark pool, or at some other hole in the system where trades slip into darkness.
Your broker routes your trade for execution to some destination, because he is paid to send it there. That’s right; your broker is paid to send your order somewhere, and if it’s an NYSE-listed stock, it probably won’t even be sent to the NYSE.
That’s because the NYSE doesn’t pay for “order flow.” Oh, wait a minute…
They do now.
Under their Retail Liquidity Program, they can now pay for order flow, kind of. They get orders directed to them by offering a slightly better price on an execution than is posted on their own Exchange.
The idea is that they can’t compete with companies like Knight, who pay for order flow (so it never gets to the NYSE) and take the other side of trades or match them off against other order flow in their systems, or other people’s systems.
I know this is a little confusing. But here’s what you need to know.
This whole “paying for order flow” thing is about collecting as many orders as you can get under your roof. The more orders you see coming your way, the better you know what the bids and offers are out there, the better you can “predict” prices, and the more profitable your trading will be… that is… if you’re high frequency trader, or a market-maker… like Knight.
So, the NYSE gets to compete with Knight. And Knight doesn’t like that. So, it upgrades its software to jump the NYSE. And it blows up.
Knight’s systems (probably “pinging” and looking to influence market prices and initiate trades) sends out orders (I’m speculating here), which end up lifting bids, which ends up triggering Knight to buy shares, which ends up being a huge cluster you-know-what, because it’s all a mistake, you know. Which means they own a bunch of stocks they don’t have enough capital to hold. Which means Goldman Sachs gets to bend another customer over.
You made me promises, promises, Knowing I’d believe. Promises, promises You knew you’d never keep.
Those lyrics are ripped from the early ’80s band Naked Eyes’ hit song “Promises, Promises.”
I use the word ripped, not because it’s a term used in the music business, but because of its more common meaning, as in ripped-off.
Because that’s what we’ve been – ripped off.
This time, which has been going on for a long time, I’m talking about how grossly underfunded both private and public pension funds are, and how we’ll all suffer the consequences.
I’m going to strip out the mumbo jumbo so you see the truth with your own naked eyes.
Retirement is getting further and further away for most Americans. And if they get there, they may not be reasonably compensated by the pension plans they thought they were paying into along with their co-payers, their private and public employers.
That’s because a lot of those co-payers aren’t paying up.
And that’s only part of the problem…
Here’s the other, even more insidious, naked truth. The investment return assumptions inherent in pension plans’ calculations are so unrealistically high that the chances of funds ever meeting future obligations, or “promises,” is halfway between slim and none.
Don’t worry, I’ll come back to the co-payers not paying up. But first let’s talk about assumptions (as in, making asses out of you and me).
Pension Plans are Based on Unrealistic Projections
The average assumption in the great majority of pension plans is that their assets will appreciate at 8% per year. Now, with compounding, that’s a really great deal.
Too bad the actual hand we’ve been dealt, courtesy of a no-interest rate (actually its closer to zero) Federal Reserve policy, for years now (and rammed-down low rates for years prior, thank you Big Alan Greenspan, with his goofy Ayn Rand hat now sitting in a corner facing backwards somewhere; or at least he should be), makes fixed income returns impossibly low. Low to the point that the “bond” portion of plan asset portfolios are causing the hole they are all slipping into to get bigger and bigger.
As a result of low return investments on the fixed income (make that failed income) side of portfolios, plan managers have nowhere to go but further and further out on the risk spectrum (read equity markets, private equity, and hedge funds).
And, given how swimmingly equities have performed over the past 10 years (my goodness, they’ve been essentially flat, how stunning; are we turning Japanese? I really think so), maybe some plans made out like bandits (that’s a joke) by wisely cherry-picking stocks. Or, on the other hand, maybe a lot of them loaded up on equities right around 2007.
Oh, the humanity!
The point is obvious. Return assumptions of 8% annually are facing the reality of 4% to 5% at best – and that’s on a good day.
Between that underfunding (it’s coming, I promise) and absurd investment return assumptions, S&P estimates private pensions are about $354.7 billion short on the front end of obligations. They’re another $233.4 billion short if you add in OPEB stuff (Other Post Employment Benefits, promises of stuff like life insurance and medical benefits).
But those numbers are a day at the beach compared to public shortfalls in their thousands of state and local plans and “systems.” That number is somewhere between $1 and $4.6 (wait for it…) TRILLION.
And Then There’s Those Pesky Contributions
So why aren’t private and public employers putting in their share of contributions? Well, it’s about the money, stupid.
Some of them, like the many corporations sitting on more than a trillion dollars in cash, don’t want to put that money into the promise pools, because they promise that they’ll find better uses for it (like bigger bonuses and salaries and benefits for executives) to make their companies more, well, profitable. You see, then they can pony up on those pesky promises. That’s capitalism under the cronyism system.
As far as public pension funds, well, you know what’s going on there. There’s no money, honey.
How can underfunded public plans get additional contributions when there’s no money at state and local levels to contribute? (Well, not exactly additional, but the ones they were supposed to have put in already, but forgot, or actually took out; yeah, funds were taken out to pay for other spending items; it’s just criminal.)
Okay, exhale, because there’s been a brilliant resolution to that riddle.
Leave it to our experienced legislators, you know, Congress, those amazing magic wand wipers, to come up with an elegant and transparent solution.
It’s Highway Bill S. 1813. That’s right. Who would have guessed the answer could be found in a highway funding bill? Simply brilliant.
It works like this: Under Section 40312 (you can Google any of this, I’m not making this up), “pension smoothing” is allowed. Pension smoothing lets plan administrators and puppeteers spread out pension asset shortfalls over multiple years so that pension plans don’t have to face the piper now and make employer contributions they don’t have, or would rather keep as dry powder for the next Great Recession.
If you call that kicking the can down the road, hey, you’re just another cynic. Because what this does is actually raise about $9.5 billion in taxes over 10 years by setting aside contributions from being contributed (and written off) so they can be taxed.
If you’re not getting it, let me help you here. It’s a Highway Bill because the $9.5 billion will go to the Highway Fund so the punters in Congress don’t have to raise the federal gas tax to pay for highway building and improvements. So that pension plans get deeper and deeper into doodoo. It’s about keeping taxes low, don’t you know? It’s an election year, don’t you know?
Seriously, here’s what I think: The fabric of the dream of retirement is unsustainable, because the “safety quilt” is already threadbare.
You want the rest of the facts on this situation, the cold hard facts? Read my article next Monday over at www.moneymorning.com.
In the meantime, by the way, this pension fund mess isn’t the only “pyramid scheme” running in our economy. My colleagues just released a new investigation. If you haven’t seen it yet, I urge you to take a look today. Just click here.
There’s a passage in the Bible that says, “The Kingdom of the Father is spread out upon the earth and men do not see it.”
Bankers see it.
The whole earth is heaven for the big banks. They rule over it like petty, greedy gods.
And that’s not because they’re too-big-to-fail; it’s because they’re too-big-to-control and have it too-good-to-ever-change their sleazy, self-serving, corrupt ways.
The latest proof of big bank’s criminal ways, that they’ve been manipulating Libor – which isn’t news, I was writing about this four years ago – isn’t an indictment. It’s a signed, sealed, and delivered verdict of “guilty.”
(Check this out, I get credit from a group of fraud lawyers for being first to call this out right here.)
Here’s the deal: Barclays, a monster British bank, was under criminal investigation for its role in fraudulently manipulating the London InterBank Offered Rate (Libor). It settled charges late on Tuesday with Britain’s Financial Services Authority (FSA), the U.S. Commodity Futures Trading Commission (CFTC), and the U.S. Department of Justice.
Yeah, about that “justice” thing…
Barclays “settled” by paying $92.8 million to the FSA (a record fine), $200 million to the CFTC (another record), and $160 million to the DOJ (a piddling amount).
But, hey, you know, they’re sorry and all that.
Sorry they got caught, that is. And they’re not alone. There will be a bunch of other big banks paying for this gross game of manipulation. And all of them are household names.
I’m not going to get all worked up over the insanity of how little the fines were on any relative basis, compared to how much Barclays made or saved (including possibly saving itself from implosion, worse than it fared in 2008).
Or how insane the “deferred prosecution” garbage is that accompanies these “settlements,” on account of the fact that they don’t really admit guilt; they just pay the pipers (regulatory extortionists who’d rather collect potty money than put criminals behind bars… oh, don’t get me started).
And I’m not going to get all over the fact that a few bigwigs at Barclays are going to forsake some compensation this year, because although they’re not guilty of anything, you know, they’re just going to take one for the team, you know.
No, I’m not going to preach. It’s not Sunday, and this ain’t Sunday school.
This is Heaven, folks… for the big banks, anyway… and here’s how it works.
What Barclays Did (and Why It Stinks)
Libor is really, really, really important.
It’s a bunch of interest rates that range from overnight rates to one-year rates. These rates are important because they are the benchmark, or “reference,” rates for some $350 trillion in OTC (over the counter) swaps, $10 trillion in loans, and $437 trillion in CME (Chicago Mercantile Exchange) Eurodollar contracts (those numbers are according to the CFTC), and trillions of dollars in derivatives contracts worldwide.
In other words, the cost of borrowing for all these loans and financial instruments is based on Libor.
Libor rates – there are 250 of them across different maturities and in different currencies – are calculated daily out of London. Generally, 18 big banks (the “panel”) post, in interest rate terms, what it would cost them to borrow (on unsecured terms) from other banks. They submit their numbers between 11:00 am and 11:10 am (London time) to Thomson Reuters. Reuters calculates the official number by throwing out the highest four entries and the lowest four entries and averaging the middle 10 posts.
What’s been going on is that Barclays and the other big banks responsible for honestly submitting their cost of money for all those maturities in the different currencies have been submitting rates that are self-serving – as in lying to make or save money for themselves.
Traders at the banks have been leaning on the designated “submitters,” who often sit within earshot of their screaming cohorts, to submit very high or very low rates because their billions of dollars of trading positions are affected by those rates.
But not only were traders trying to influence rates, senior managers were in the game in an even bigger way.
You see, when banks submit their interest rates, they’re supposed to be saying, this is what I’d have to pay to borrow based on who will lend to me at what prices. If they post really high numbers, they’re in effect saying, we have to pay more to borrow, because the other banks are charging us a higher rate, because they think we’re a higher risk to lend to.
During the 2008 credit crisis, banks weren’t lending to each other, but they still posted artificially low Libor rates. Why? Because they didn’t want to be seen as essentially illiquid or insolvent. Because if they couldn’t borrow cheaply enough, it would be “game over” for them.
So management was in on the manipulation. They were all in on saving their own butts and manipulating rates to enhance their trading books.
What’s the big deal?
There are tons of ramifications. Some real and some theoretical. “Theoretical” meaning they can’t be proven.
Here’s one. By artificially keeping rates low, did the manipulation game create more cheap lending across all mortgages and loans during the run-up to disaster? Did these banks facilitate the lending by which they all prospered across the board (until the music stopped and there weren’t enough chairs; actually there weren’t any chairs) by manipulating rates? You bet they did.
That ain’t theory, I’ll argue it all day long with any takers.
Lying, cheating, and, to put it politely, manipulating banks rule the earth. They’ve created their own Heaven. And we’re all facing Hell because of it.
It’s criminal; no, not what they do (that’s business as usual, folks). It’s criminal that regulators and governments haven’t put the guilty in jail, but let them pay fines and go back to their dirty business as usual.
[Editor's Note: We recently had Shah in our office to talk about the crisis in the Eurozone. His insight on the machinations of the central banks is as entertaining as it is enlightening. In Shah's usual style, he reveals the Ponzi scheme they've got going. We'll have this interview to you this afternoon. It's worth looking for.]
Here’s a little bit of advice you can use to make money.
There’s big money in lying.
I’ll show you how it has worked for people like Beth Jacobson, who fell off the Wells Fargo “stagecoach from hell” after making millions pushing subprime mortgages there. And for Jamie Dimon, who I’d love to see get kicked off the JPMorgan gravy train, where he’s been lying for years, while making himself hundreds of millions, to ING Bank, who lied about doing business with Iran and Cuba to make millions in fees.
Here’s the thing.
When you know how the Matrix works, you can make money on the lies building up, and then make money on them being exposed for what they are.
First, let’s get back to our liars, because there’s a lot of humor in seeing them get caught in their lies…
One Woman’s Liar Loans
So, I’m reading this piece this morning in the Washington Post about Beth Jacobson. As I said, she used to work for Wells Fargo, peddling a lot of subprime mortgages, and now she’s calling them out on their “stagecoach from Hell” practices, ripping people off and everything.
And I’m flat-out laughing so hard that I actually start choking. I’m choking on the crap this woman is spewing, and on this garbage article that is so inane that it’s embarrassing as a piece of journalism, or whatever it’s supposed to be.
It makes me realize that, while I may be an annoying, in-your-face, no-holds-barred hammer at times, at least I take a stance for the truth.
In any case, Ms. Jacobson is now something of a whistleblower (though not really from the “inside” anymore, because she’s been out of Wells since 2007), on account of her claiming that the bank’s practice of targeting certain minorities and folks stupid enough to believe they were making millions – which they weren’t (and good thing they didn’t have to prove it by being talked into some high-interest no-document loans, against their better judgment) – and getting liar loans to buy houses they shouldn’t have dreamt about even at twice their actual incomes.
But, before she realized that Wells Fargo was a bad egg, harming all those innocents, this woman was the bank’s No. 1 salesperson (in the whole country, folks). She was selling, you guessed it, subprime mortgages. She was making a lot of money selling up to $50 million worth of liar loans and other toxic crap to her flock of innocents, year in and year out.
Then, strictly by pure chance, or God’s will – I’m never sure which is which sometimes – in 2007, right around the time that the subprime market hits a brick wall, poor little rich girl Beth is outed, I mean ousted, from Wells. Something to do with production; who knows for sure?
Now, though, the lies that she is foisting on the public are revolting.
She made millions soaking innocent homebuyers by placing them in high-fee (it’s all about the fees, folks; it’s always about the “what’s the best fee for me” deal, screw the Muppets) mortgages. As strange as this might sound, these are the same high-interest loans that these dumb (I mean innocent) homebuyers got saddled with. (You see, it’s the high interest rates that account for the high fees the salespeople are paid, or maybe it’s the other way around, either way… you get that, right?)
Then she decided to blow the whistle. Why? Oh, because her new job (she’s a self-employed, do-gooder, pay for services, for profit, you-know-what) is all about helping the same poor people she set up like bowling pins get their lives and foreclosed homes out of the gutter, for a fee… did I say that?
Now, let’s say you’re really good at lying. Then you get to run the liar’s lair.
That honor goes to Jamie Dimon.
The Leader of the Liar’s Club
Yesterday he lied through his teeth to the idiots and some strumpets whose campaigns he and his bank finance; yeah I’m talking about the liars in Congress. But this is not about them…
It’s about how Jamie lied about not knowing what risks the CIO was taking (he knew two years ago). He lied about their losses being a “tempest in a teapot.” And he is lying to the point that I’m going to vomit, when he says they were hedging and not prop trading.
All I’ll say about Jamie is that I used to respect him. Now I see him for what I had always hoped he was above being and doing.
If he is going to claw back some money from the JPM executives responsible for the lying and losses, he has to give back all his compensation, because he’s the leading liar at the liar’s club.
My point is this: The financial services industry starts on the ground floor, with individual liars lying for larger and larger fees for themselves. Then it moves up the chain to the lying executives, who overlook the liars below them to reap the large fees all their collective lies affords them. And it keeps going, all the way to the institutions themselves. (Not that they are not run by humans, they are, although sometimes it seems that the institutions themselves are built on concrete pillars lying in quicksand.)
And that’s makes the industry what it is… the ultimate liar’s club.
And as far as banks as institutions go, in 2009, Credit Suisse Group AG paid $536 million on account of a particular set of lies; in 2010, Barclays PLC paid $298 million on account of the same lies, Lloyds Banking Group PLC paid $350 million, and the winner and record holder of the highest “fine” for these same lies, with a total of $619 million, was just announced to be ING Bank, a unit of ING Groep NV.
What lies you ask? How about, in the case of ING Bank, “stripping” out transaction information that would have revealed that the bank was dealing with Iran and Cuba and channeling their money transfers through Manhattan channels (which most have to go through often enough). That is illegal, as in completely illegal, not on a regulatory level, but on a federal, trading-with-the-enemy level.
All of them did it anyway, for the fees, you know. All of them got caught, you know.
And all of them got away without being criminally prosecuted on account of them being offered “deferred prosecution agreements” also known as the liars’ labyrinth.
So, the moral of the story is… There’s money to be made lying, and there’s money to be made when the lies are laid bare. And you can have it both ways. That’s what this Matrix thing you’ve been seeing is about, and that’s what my Capital Wave Forecast folks have been doing for more than two years now.
Okay, let me say this about that. About last night, I mean.
Sometimes I feel like I’m living a fantasy.
Take last night. I’m in a club in Miami, okay, the club, Liv at the Fontainebleau. And I meet maybe my future wife. Don’t laugh, it happens. And she’s beautiful, and smart and funny, and she’s got spunk, and is a great kisser.
I did say this is a fantasy, right?
You don’t believe me? Well, let me tell you another fantasy, another made-up story. And remember, as you read this too, it’s a fantasy. I made it up to entertain you, even if people say, “You can’t make this stuff up.”
So, once upon a time and all that, this big office, we’ll call it the Chief Investment Office, at a big, make that a too-big-to-fail, bank has orders from its bosses (there are always “bosses,” plural, when mistakes are made) to play with the roughly $360 billion they are… well, playing with.
But because the amount of money being played with is itself a fantasy, the game being played has to be on the magnitude of a fantasy, too.
We’ll call the game being played… trading.
And the object of the game is to make money.
No, it’s not a game of hedging. You see, if the game was hedging, even “portfolio” or “economic” hedging, then there wouldn’t be one-way losses. There would be gains somewhere that offset those losses. It’s kind of how hedging works. But that’s another story…
In any case, around the time that the bosses, ram-rodded by a single boss – because, of course, there’s always one at the top – are wanting to fantasy-up their P&L (that’s profit and loss, for you non-accountants) at this too-big-to-manage bank, which is happening around September of last year, one of the banks’ “prop” traders leaves the bank.
Because banks aren’t supposed to be prop trading.
Well, because this is a fantasy, let’s just say the guy, who we’ll call Toby, leaves the bank to go work for a hedge fund, which we’ll call Saba, which kind of means grandfatherly wisdom.
Now, the fantasy part kind of starts here. That’s because the hedge fund who hires the guy named Toby kind of knows that he knows what that bank is trading. Because, you see, the guy who hires him used to trade for the bank, too.
Here’s the real crazy part. This Toby fellow just happens to dabble in trading stuff, like “relative value” (which, again, for you non-accountants, means the difference between two instruments) derivatives trading.
What’s crazy about all that is that the bank was – almost at that exact same time – making some fantasy-wide relative value trades itself. Not that anybody outside the bank knew that, not even this Toby fellow or the hedge fund run by a guy we’ll call Boaz (as in Weinstein) that hired him at almost the same time (did I already say that?). Because, you know, trading secrets like that are precious, and no one would ever knowingly get hired by a hedge fund to trade on some kind of proprietary information. Proprietary, as in prop trading.
Okay, you starting to get it?
Fast forward a few months…
And this guy Boaz happens to be speaking at a Boys & Girls conference at, believe it or not, one of the nice offices of the too-big-to-manage but not too-big-to-implode bank’s midtown digs. When, like the other hotshot participants, he gives up his favorite trade to be doing now.
The guy’s favorite trade just happens to be a relative value trade (wonder where he got that from?) that he recommends to all these other big hedge fund guys and dolls with their own fantasy money to fantasize with.
And, almost like that, the trade that the bank had on – the one that was fantasy huge -which the trader at Saba, who came from the bank, was on the other side of (and now a few other hedgies would be on the opposite side of) started making money.
So, for you non-accountants, that means if the trade that the bank was in, we’ll call it the IG-9 trade, that the trader at Saba was on the opposite side of (now that’s what I call relative value), was making money for the hedgies, it means the bank was losing money.
Remember, the game is trading. Only one side wins at a time.
And then the bank started losing more money.
You can see this trade isn’t of good relative value to the bank.
But, I digress.
Oh, maybe not. Maybe that’s the whole story? Maybe there isn’t much to this story after all. Indeed, maybe it’s not a fantasy after all.
Because only in a fantasy world would a big trader, overseen by big risk managers and a big boss who manages the risk managers, be dumb enough to get into a trade in such a big way, and then let the guys on the other side screw with you.
Never in reality would such a thing happen.
But it did. And it’s still happening. My new guess is that JPMorgan’s $2 billion loss we first heard about on May 10 will actually end up being $5 billion… and counting.
So, the moral of the story is fantasies do come true, pigs do fly, hedging is trading is hedging is trading, and I might be getting married.