by ilene - December 10th, 2013 10:43 am
Courtesy of Pam Martens.
It’s five years and counting since Wall Street collapsed under the weight of its own corruption, aided and abetted by compromised regulators, and yet, by many measures, the financial system is more vile than it was pre-crisis.
Yesterday, Andrew Brooks, head of U.S. equity trading at mutual fund giant T. Rowe Price, which manages $647 billion in customers’ funds, called the markets “dysfunctional” in an article in the Wall Street Journal. Mentioned elsewhere in the article was the growing unlit marketplace where trades are conducted by more than 40 dark pools away from exchanges or the continuing practice of internalization where the biggest Wall Street firms match their own customers’ buy and sell orders away from the stock exchanges.
The signature financial reform legislation of the Obama administration, the Dodd-Frank Wall Street Reform and Consumer Protection Act, is increasingly seen as a bureaucratic boondoggle, embedded with layers of hoops and hurdles by Wall Street’s lawyers and lobbyists to ensure that heightened regulation of Wall Street remains forever on the distant horizon. It’s almost three and one half years since the passage of Dodd-Frank and yet Wall Street is rife with corruption, conflicts, market rigging and cartel behavior on an unprecedented scale.
The tiny ray of sunshine is that the situation is so bad that good minds are looking at more than reforming the status quo and taking a hard look at the overall structure of the financial system in the United States. Increasingly, attention is focusing on the inherently conflicted contours of the Federal Reserve as both a central bank engaged in monetary policy while simultaneously wearing the hat of a key Wall Street regulator.
The always insightful Nomi Prins has a new book coming out early next year, All the Presidents’ Bankers, which has plumbed presidential archives for documents explaining how this unique structure in the world of central banks evolved, moving through history from the panic of 1907 to the crash of 2008. The book, not yet available for review, is billed as “an explosive account of the hundred-year interdependence between the White House and Wall Street” which explores “the alarming global repercussions of a system lacking barriers between public office and private power. Prins leaves us with an ominous choice: either…
by ilene - December 10th, 2013 9:44 am
Submitted by Tyler Durden.
And so it is done (as we detailed here)… and due to be put in place as of April1st 2014 (rather ironically). The 100-plus-pages of rules and regulations prohibit two activities of banking entities: (i) engaging in proprietary trading; and (ii) owning, sponsoring, or having certain relationships with a hedge fund or private equity fund. But the kicker…
requires banking entities to establish an internal compliance program designed to help ensure and monitor compliance with the prohibitions and restrictions of the statute and the final rule.
Great! Because self-regulation worked so well in the past for the financial services industry.
- FEDERAL RESERVE EXTENDS VOLCKER RULE COMPLIANCE PERIOD TO JULY 2015 FROM JULY 2014 – FINAL VOLCKER RULE DOCUMENT
- RULE WOULD ALLOW HEDGING ACTIVITY THAT MITIGATES "SPECIFIC, IDENTIFIABLE RISKS OF INDIVIDUAL OR AGGREGATED POSITIONS" HELD BY THE BANK – REGULATORS
- BANKS COULD ENGAGE IN PROPRIETARY TRADING OF US GOVERNMENT DEBT AND, IN MORE LIMITED CIRCUMSTANCES, FOREIGN OBLIGATIONS UNDER VOLCKER RULE
- VOLCKER RULE ALSO BANS BANKS FROM OWNING AND SPONSORING "COVERED" HEDGE FUNDS AND PRIVATE EQUITY FUNDS – REGULATORS
- REGULATORS SAY FINAL RULE DEFINES "COVERED FUNDS" MORE NARROWLY THAN PROPOSAL WITH REGARD TO FOREIGN FUNDS AND COMMODITY POOLS
- U.S. REGULATORS SAY MOST COMMUNITY BANKS HAVE LITTLE OR NO INVOLVEMENT IN PROHIBITED ACTIVITIES, WOULD NOT HAVE TO COMPLY WITH RULES
Who will be most affected?
Merriam-Webster’s Dictionary defines “speculation” in 31 words. The key ones are “risk of a large loss.” When Paul Volcker, the former U.S. Federal Reserve chairman, proposed banning speculation by federally insured banks to reduce risk to the world economy, he did it in one paragraph. Four years later, the nation’s regulators are poised to vote on Volcker’s proposal. The rule now runs close to 100 pages, with hundreds more in supporting material — and no one is quite sure how it would be enforced. It’s a lesson in how complicated simplifying Wall Street can be.
The idea became
by ilene - December 10th, 2013 6:02 am
Courtesy of Larry Doyle.
The big news on Wall Street today is the reemergence of the Volcker Rule intended to make our banking system safer from the perils of proprietary trading activity.
The question that America will hear bandied about until it makes your head spin is “What exactly defines proprietary trading?”
My ‘sense on cents’ response is that not unlike pornography, proprietary trading might be hard to define but you know it when you see it. Let’s review and cross-examine The Wall Street Journal’s take on this newly proposed rule which attempts to accomplish the following:
. . . bans banks from making bets with their own money and limits their ability to invest in certain trading vehicles, such as hedge funds and private-equity vehicles.
LD’s cross: I can tell you that proprietary trading is NOT a trader who makes markets for customers selling one security, say a 10 year Treasury, and then buying another, say a 5 year Treasury, to manage his risk. Proprietary trading is more aptly described as a trader or group of traders off in the corner, allocated balance sheet and capital, and typically using highly quantitative strategies (black box) to play the market. JP Morgan had one such group engaged in this very sort of activity that was dismantled when talk of this rule was first broached. The “London Whale’ trade emanated from within the firm’s chief investment office.
One other question. Does this Volcker Rule apply to the regulator FINRA which in its most recent annual report indicates that it has 20 per cent of its own internal investment portfolio in alternative investments? What’s good for the goose should be good for the gander, no?
The approval would bring to an end a 2½-year effort to complete the 2010 Dodd-Frank provision.
LD’s cross: Let’s see here. Dodd-Frank, including a mandate to implement a rule against proprietary trading, was passed in 2010. What year is it? Oh yeah, 2013. Two and a half years? Those at the WSJ may want to check their math.
What does it say about our government and financial regulators that it takes them three and a half years to implement a regulation that is presented as a cornerstone of financial regulatory reform legislation? It says that many of the participants and related parties were and still are warmly and snugly in…
by ilene - December 9th, 2013 11:47 pm
Courtesy of Robert Reich
The President’s speech yesterday on inequality avoided the “R” word. No politician wants to mention “redistribution” because it conjures up images of worthy “makers” forced to hand over hard-earned income to undeserving “takers.”
But as low-wage work proliferates in America, so-called takers are working as hard if not harder than anyone else, and often at more than one job.
Yet they’re still not making it because the twin forces of globalization and technological change have reduced their bargaining power and undermined their economic standing — while bestowing ever greater benefits on a comparative few with the right education and connections (and whose parents are often best able to secure these advantages for them).
Better education and training for those on the losing end is critically important, as will several of the other proposals the President listed. But they will only go so far.
The number of losers is growing so quickly, and so much of the economies’ winnings are going to a small group at the top — since the recovery began, 95 percent of the gains have gone to the richest 1 percent — that some direct redistribution of the gains is necessary.
Without some redistribution, the losers are likely to react in ways that could hurt the economy. They’ll demand protection from global markets they believe are taking away good jobs, and even from certain technological advances that threaten to displace them (rather than smash the machines, as did England’s 19th-century Luddites, they’ll seek regulations that preserve the old jobs).
Without some redistribution, our ever-increasing number of low-wage workers won’t have enough money to keep the economy going. (This is one reason why the current recovery has been so anemic.)
And without some redistribution, America’s growing army of low-wage workers may fall prey to demagogues on the right or left who offer convenient scapegoats for their frustrations.
One way we already redistribute is through the Earned Income Tax Credit, a wage subsidy for the working poor, which, at about $60 billion a year, is the nation’s largest anti-poverty program. It’s like a reverse income tax — larger at the bottom of the wage scale (now around $3,000 for incomes around $20,000) and gradually tapering off as incomes rise (vanishing at around $35,000).
by ilene - December 9th, 2013 11:17 pm
Courtesy of Robert Reich
The Justice Department has just obtained documents showing that JPMorgan Chase, Wall Street’s biggest bank, has been hiring the children of China’s ruling elite in order to secure “existing and potential business opportunities” from Chinese government-run companies. “You all know I have always been a big believer of the Sons and Daughters program,” says one JP Morgan executive in an email, because “it almost has a linear relationship” to winning assignments to advise Chinese companies. The documents even include spreadsheets that list the bank’s “track record” for converting hires into business deals.
It’s a serious offense. But let’s get real. How different is bribing China’s “princelings,” as they’re called there, from Wall Street’s ongoing program of hiring departing U.S. Treasury officials, presumably in order to grease the wheels of official Washington? Timothy Geithner, Obama’s first Treasury Secretary, is now president of the private-equity firm Warburg Pincus; Obama’s budget director Peter Orszag is now a top executive at Citigroup.
Or, for that matter, how different is what JP Morgan did in China from Wall Street’s habit of hiring the children of powerful American politicians? (I don’t mean to suggest Chelsea Clintongot her hedge-fund job at Avenue Capital LLC, where she worked from 2006 to 2009, on the basis of anything other than her financial talents.)
And how much worse is JP Morgan’s putative offense in China than the torrent of money JP Morgan and every other major Wall Street bank is pouring into the campaign coffers of American politicians — making the Street one of the major backers of Democrats as well as Republicans?
The Foreign Corrupt Practices Act, under which JP Morgan could be indicted for the favors it has bestowed in China, is quite strict. It prohibits American companies from paying money or offering anything of value to foreign officials for the purpose of “securing any improper advantage.” Hiring one of their children can certainly qualify as a gift, even without any direct benefit to the official.
JP Morgan couldn’t even defend itself by arguing it didn’t make any particular deal or get any specific advantage as a result of the hires. Under the Act, the gift doesn’t have to be linked to any particular benefit to the American firm as long as it’s intended to generate…
by ilene - December 9th, 2013 10:37 pm
Courtesy of Jesse's Cafe Americain
A sign of the times. Plus ça change, plus c'est la même chose.
"The nine largest colleges of the university are King's College London; University College London; Birkbeck, University of London; Goldsmiths, University of London; the London Business School; Queen Mary, University of London; Royal Holloway, University of London; SOAS, University of London; and London School of Economics and Political Science."
Et tu, LSE?
London's Biggest University Bans Student Protests
The University of London has obtained a court order banning student protests on its campuses for the next six months after a demonstration against how the university is run resulted in 38 arrests last week.
“This is a regrettable but necessary step that we have taken in order to prevent the type of violent and intimidating behaviour that we have seen by protesters at Senate House recently,” said Chris Cobb, Chief Operating Officer and University Secretary, regarding the injunction.
Police were brought in to break up a sit-in on Wednesday after which students accused the police of assaulting students.
The students' demands include a halt to privatisation, fair pay for workers and a halt to a controversial plan to close the student union. They are protesting against the way higher education as a whole is controlled they say.
The student union outlined their stance, “Occupations are a legitimate form of dissent. When our university exploits our staff, shuts down our student union, and are utterly unaccountable to the students and staff that give it life and make it function, students have no choice but to gain leverage in whatever way they can.”
Speaking to Anadolu Agency, Michael Chessum, president of the University of London Student union said, “I have myself been thrown to the ground and I’ve witnessed widespread violence from the police, including crutches being kicked away from under someone, a lot of swinging punches, and people being beaten to near unconsciousness during their arrest.”
Some 135,090 students (approximately 5% of all UK students) attend one of the University of London's affiliated schools.
by ilene - December 9th, 2013 7:20 pm
Courtesy of Mish.
Detroit’s emergency manager Kevyn Orr says a pension fund takeover is a “right, if not an obligation” after Orr learned of extra, unwarranted pension payments.
Please consider Emergency Manager Weighs Pension-Fund Takeover.
Kevyn Orr said in a recent interview that at the current pace, the city’s General Services System pension fund could lose its ability to pay pensions owed to current and future retirees within 12 years. A takeover is a “right, if not an obligation, that I have to consider under the statute, and we’re considering that right now,” he said.
Representatives of the pension board said Mr. Orr’s figures were faulty.
The Oct. 25 draft report by the city’s auditor general and inspector general, which was reviewed by The Wall Street Journal, found that during the 12 years ended in fiscal year 2012, the pension funds paid $1.22 billion of interest credits into retirees’ savings accounts while the funds had losses of $2.05 billion, or 29% of their net asset value.
Earlier this year, Mr. Orr unveiled a proposal calling for the city to pay 20 cents on the dollar for the $3.5 billion that the city says it owes its two pension funds, one for 20,500 nonuniformed retirees and one for 12,700 retired police and firefighters.
“When workers in Chicago and L.A. realize that their pension benefits are no longer inviolate, unions are going to say what they really want is not bigger benefits but better funding. And that’s going to put enormous pressure on current budgets,” said Robert Novy-Marx, associate professor of finance at the Simon Business School at the University of Rochester.
A person familiar with the matter said Mr. Orr would like to engineer a takeover of the city’s General Retirement System for nonuniformed employees and retirees. Mr. Orr’s office estimates that the fund has only 64% of what it needs to meet its obligations, while fund officials put the figure at 80%. The separate fund for the city’s police and firefighters is in better shape, both Mr. Orr and fund officials say.
Michigan’s emergency-manager law allows for the takeover of a municipal pension system that is less than 80% funded.
20 Cents on the Dollar
Twenty cents on the dollar sounds about right to me. But Orr ought to take
by ilene - December 9th, 2013 4:38 pm
Submitted by Tyler Durden.
The spin does not get any better than this… As they reported they would,
- *LEW SAYS U.S. SOLD ALL REMAINING SHARES OF GENERAL MOTORS RECOUPING $39 BLN OF ORIGINAL GM INVESTMENT
That is a $10.5 Billion loss! But, The Center for Automotive Research, a Michigan nonprofit organization that analyzes auto industry issues, those funds “saved or avoided the loss of $105.3 billion in transfer payments and the loss of personal and social insurance tax collections — or 768% of the net investment.”
And The White House…
Efforts Saved Jobs, Helped Stabilize Economy During Financial Crisis
WASHINGTON – As the Troubled Asset Relief Program (TARP) continues to wind down, the U.S. Department of the Treasury today announced that it has sold all of the remaining shares of General Motors (GM) common stock.
“The President’s leadership in responding to the financial crisis helped stabilize the auto industry, and prevent another Great Depression. With the final sale of GM stock, this important chapter in our nation’s history is now closed,” said Treasury Secretary Jacob J. Lew. “The President understood that inaction could have cost the broader economy more than one million jobs, billions in lost personal savings, and significantly reduced economic production. As a result of his efforts, which built on those of the previous Administration, more than 370,000 new auto jobs have been created, and all three U.S. automakers are profitable, competitive, and growing.”
Treasury has recouped a total of $39 billion from the original GM investment. To date, Treasury has recovered a total of $432.7 billion on all TARP investments – including the sale of Treasury’s shares in AIG – compared to $421.8 billion disbursed. Treasury will continue to wind down the remaining investments in a manner that balances maximizing the taxpayer’s return on investments with the speed of our exit.
Additionally, the center said the bailouts and financial restructurings saved about 2.6 million jobs in the U.S. economy in 2009 and $284.4 billion in personal income over 2009 and 2010.
Prisoner’s Dilemma Game in Greece; Contagion-Spread Eurozone Breakup More Likely Now; How will Greece NOT pay back €320 billion?
by ilene - December 9th, 2013 3:34 pm
Courtesy of Mish.
As a result of Troika-imposed austerity, Greece has a current account surplus that widened in September to over a billion euros.
This happened because demand for foreign goods collapsed in the wake of 27.3% overall unemployment and a shockingly high 57.9% youth unemployment.
The Coming Greek Default
In spite of a current account surplus, Greece’s overall debt load is unsustainable.
Here are a couple of key details: Greece has €320 billion in sovereign debt. Greece’s debt-to-GDP ratio is 174%.
Recall that the Troika considered anything beyond 120% unsustainable. Also recall that Greek debt was restructured twice to meet those targets.
The pertinent question is not “How will Greece pay back €320 billion?” because it can’t and won’t. Rather, the pertinent question is “How will Greece NOT pay back €320 billion?”
- Default accompanied by an exit from the eurozone
- Debt relief from Germany and the rest of the eurozone
For political consumption purposes ahead of the last federal election, German chancellor Angela Merkel ruled out more aid to Greece. That blatant lie was probably enough to hold support for the eurosceptic AfD party below the 5% threshold to make German parliament. AfD failed by 0.2 percentage points.
Had Merkel admitted the truth, it’s hard to say how many more votes AfD would have gotten, but I suspect far more than 0.2 percentage points.
With election lies out of the way, the corollary questions for Germany now are quite similar….
by ilene - December 9th, 2013 1:13 pm
Courtesy of Rick at Consumer Metrics Institute
At the CMI, we have a unique perspective on the economy. We measure consumer demand on a daily basis, providing nearly two orders of magnitude more resolution than the BEA's GDP releases. This is like moving from naked eye observations to using a lab-grade microscope. As a result we can see timing relationships that simply can't be seen in quarterly data.
Here is our latest report with charts updated as of Dec. 7, 2013.
[For background on the Consumer Metrics Institute's methods for gaining unique insight into the economy, read a 2010 interview with Rick and Ilene here.]
Daily Absolute Demand Index
(Click here for best resolution)
(1) A projection of our basic year-over-year data into an aggregate absolute demand, reflecting the compounding impact of extended expansions or contractions. The daily data is normalized such that the year-long average for 2005 would be at 100 in the chart.
Monthly Absolute Demand Index(3)
(Click here for best resolution)
(3) A projection of our basic year-over-year data into an aggregate absolute demand, reflecting the compounding impact of extended expansions or contractions. The data points represent month-long averages of the daily data, normalized so that the year-long average for 2005 would be at 100 in the chart.
Current Weighted Composite & Sector Index Values
(Click here for best resolution)
Current Growth Index Values & Percentiles:
December 5, 2013 – BEA Revises 3rd Quarter 2013 GDP Growth Sharply Upward to 3.60% Annual Rate:
In their second estimate of the US GDP for the third quarter of 2013, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a 3.60% annualized rate, up a surprising 0.76% from the 2.84% growth rate previously reported for the quarter. The improvement in the headline growth number came principally from growing inventories (now contributing 1.68% to the headline, up 0.85% from…