by ilene - May 4th, 2011 12:45 pm
Courtesy of The Epicurean Dealmaker
This is the true joy in life, the being used for a purpose recognized by yourself as a mighty one; the being thoroughly worn out before you are thrown on the scrap heap; the being a force of Nature instead of a feverish selfish little clod of ailments and grievances complaining that the world will not devote itself to making you happy.
Beware of the pursuit of the Superhuman: it leads to an indiscriminate contempt for the Human.
— George Bernard Shaw, Man and Superman
Steven Davidoff opens a recent piece at The New York Times DealBook blog with the following words:
This is powerful language. What does he mean?
Well, for one thing he means that the reputations of individual investment banks are no longer coterminous with the reputations of their executives and employees. He ascribes this to the tremendous growth in scale and complexity of financial markets over the past three decades:
Today’s Wall Street is not the Wall Street of 1907 when J.P. Morgan single-handedly used his reputation and wallet to stem a running financial panic.
Until the 1980s,… Wall Street was made up of traditional partnerships. These were small groups of investment bankers who represented companies in offering and selling securities and occasionally acquisitions. These bankers put their individual reputations on the line, because there were so few of them. Morgan Stanley, for example, had only 31 partners in 1970 and fewer than 1,000 employees.
But this began to change in the 1980s. Trading markets became much more sophisticated, and trading and brokerage became the investment banks’ primary business. This is a technology game. The better the technology, the better the trading and brokerage operation. Individuals became less important.
The growth of more complex capital markets and a global economy also created much larger financial institutions. Morgan Stanley now has more than 62,000 employees. These banks could use their assets and position to compete in the market for finance and trading. Again, individuals were less important as size dominated. A client now trades or does business with a bank based on its positions or ability to make a market or loan. The executive at the bank executing the transaction is unimportant.
In one respect, this is true. Lazard is no longer Felix Rohatyn. Goldman Sachs is no longer Sidney Weinberg. The
by ilene - July 23rd, 2010 9:25 pm
Courtesy of MIKE WHITNEY writing at CounterPunch
Credit conditions are improving for speculators and bubblemakers, but they continue to worsen for households, consumers and small businesses. An article in the Wall Street Journal confirms that the Fed’s efforts to revive the so-called shadow banking system is showing signs of progress. Financial intermediaries have been taking advantage of low rates and easy terms to fund corporate bonds, stocks and mortgage-backed securities. Thus, the reflating of high-risk financial assets has resumed, thanks to the Fed’s crisis-engendering monetary policy and extraordinary rescue operations.
Here’s an excerpt from the Wall Street Journal:
"A new quarterly survey of lending by the Federal Reserve found that hedge funds and private-equity funds are getting better terms from lenders and that big banks have loosened lending standards generally in recent months. The survey, called the Senior Credit Officer Opinion Survey, focuses on wholesale credit markets, which the Fed said functioned better over the past quarter." ("Survey shows credit flows more freely", Sudeep Reddy, Wall Street Journal)
In contrast, bank lending and consumer loans continue to shrink at a rate of nearly 5 per cent per year. According to economist John Makin, there was a "sharp drop in credit growth, to a negative 9.7 per cent annual rate over the three months ending in May." Bottom line; the real economy is being strangled while unregulated shadow banks are re-leveraging their portfolios and skimming profits. Here’s more from the WSJ:
"Two-thirds of dealers said hedge funds in particular pushed harder for better rates and looser nonprice terms, and they said some of the funds got better deals as a result….(while) The funding market for key consumer loans remained under stress, with a quarter of dealers reporting that liquidity and functioning in the market had deteriorated in recent months." ("Survey shows credit flows more freely", Sudeep Reddy, Wall Street Journal)
As the policymaking arm of the nation’s biggest banks, the Fed’s job is to enhance the profit-generating activities of its constituents. That’s why Fed chair Ben Bernanke has worked tirelessly to restore the crisis-prone shadow banking system. As inequality grows and the depression deepens for working people, securitization and derivatives offer a viable way to increase earnings and drive up shares for financial institutions. The banks continue to post record profits even while the underlying economy is…
by ilene - July 9th, 2010 11:22 am
Courtesy of JESSE’S CAFÉ AMÉRICAIN
Chris Whalen of Institutional Risk Analyst has this interesting interview on CNBC, sent to me by a reader.
I have not watched that television channel in some years, finding their shallowness and hypocrisy too much to bear. Of course my refuge, Bloomberg Television, has lowered its standards so much, with spokesmodels and smirking chimps, that it may have achieved parity. Are Cramer, Kudlow and Kernan still kicking? Remarkable.
This is an interesting exposition of the currency wars, and the pandering to the big financial institutions by the Fed over the past fifteen years, ultimately at the expense of the real economy in the distortions and misallocation of capital which the financial engineers have fostered.
Here is the interview with Jim Rickards to which Chris alludes.
Chris Whalen sounds like me. I wonder if he can cook?
by ilene - July 8th, 2010 4:19 pm
The U.S.’s Financial Reform bill is over 2,000 pages. It includes exemptions and lots of opportunities to create loopholes. Behavior that caused our ongoing global financial crisis is guaranteed to continue, if we don’t have swift and effective deterrents.
Saucier asserts that if you are making money on Wall Street--or at a hedge fund--there is no law, except the unwritten law: Don’t get caught.
Financial institutions used extensive legal resources to "technically" comply with the law. (In many cases, laws were broken, but this interview is not addressing those cases of illegal conduct.)
Saucier explains that labeling a financial institution "obscene" is an effective social deterrent. U.S. citizens have the right to own property and to make money. We also enjoy freedom of speech, up to a point. The Supreme Court stated that when "art" becomes obscene--and the court worked hard to define what is meant by "obscene"--it is no longer considered art and does not enjoy the protection of freedom of speech.
The most highly compensated players in finance are hedge fund managers earning $1 billion to $4 billion per year. Saucier says that when you see someone making money--billions of dollars a year in bonuses by exploiting the subprime crisis--then one can take the view that part of the remuneration is obscene. The same can be said for many bank CEOs, who may earn somewhat less economic compensation, but enjoy countless valuable perks.
Banks enjoy taxpayer-funded benefits including tens of billions of bailouts and ongoing funding subsidies. For example, Goldman Sachs and Morgan Stanley receive taxpayer subsidized funding by virtue of their new post-crisis ability to borrow from the Fed. Taxpayers may decide that just as we don’t wish to fund obscenity posing as "art," we don’t wish to subsidize "finance" that is simply obscenity.
Mr. Saucier puts it this way:
"They are committing acts of obscenity…They are morally bankrupting society…It’s obscene like kiddie porn is obscene…On the financial front that’s what [corrupt financiers are] guilty of."
Financial firms pay a lot to circumvent laws, and they are more aggressive and faster than our ability to legislate.
by ilene - June 30th, 2010 3:32 pm
Courtesy of Karl Denninger of The Market Ticker
Oh, so the banks don’t just bilk investors and rip off municipalities, they also help Mexican Gangs run drugs?
This was no isolated incident. Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers — including the cash used to buy four planes that shipped a total of 22 tons of cocaine.
The admission came in an agreement that Charlotte, North Carolina-based Wachovia struck with federal prosecutors in March, and it sheds light on the largely undocumented role of U.S. banks in contributing to the violent drug trade that has convulsed Mexico for the past four years.
That’s nice. Guns and ammunition cost money – lots of it. Getting that money requires some means of transporting it and "laundering" it. For that, we turn to the largest financial institutions in the world, who, it turns out, have never been prosecuted for these felonious acts.
“Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations,” says Jeffrey Sloman, the federal prosecutor who handled the case.
Blatant disregard? Sounds like something you’d say at a sentencing hearing, right? Well, no….
No big U.S. bank — Wells Fargo included — has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.
‘No Capacity to Regulate’
Large banks are protected from indictments by a variant of the too-big-to-fail theory.
Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering.
The theory is like a get-out-of-jail-free card for big banks, Blum says.
“There’s no capacity to regulate or punish them because they’re too big to be threatened with failure,” Blum says. “They seem to be willing to do anything that improves their bottom line,
by ilene - May 8th, 2010 1:21 pm
Courtesy of MIKE WHITNEY writing at Counterpunch
On Thursday, shares tumbled across all major indexes on fears that Greece’s debt woes would spread to other vulnerable countries in the E.U.. What began as a down-day on Wall Street, quickly turned into a full-blown rout as blue chips, financials, techs and transports were all caught in a program-trading downdraft. The bloodletting was mind-numbingly swift. In one 15 minute period, stocks plunged more than 300 points (and nearly 1,000 points at their nadir) before bouncing off the bottom and clawing back some of the day’s losses. For the big brokerage houses and investment banks, the massacre could not have happened at a worse time. Skittish retail investors have already been steering clear of Wall Street, convinced that the markets are rigged. Thursday’s ructions are sure to keep them on the sidelines even longer.
"During the sell-off, Procter & Gamble shares plummeted nearly 37 percent to $39.37… prompting the company to investigate whether any erroneous trades had occurred. The shares are listed on the New York Stock Exchange, but the significantly lower share price was recorded on a different electronic trading venue.
"We don’t know what caused it," said Procter & Gamble spokeswoman Jennifer Chelune. "We know that that was an electronic trade … and we’re looking into it with Nasdaq and the other major electronic exchanges." Mathew Goldstein, Reuters)
When stocks nosedive, falling prices can trigger stop-loss orders which spark a selloff. Add high-frequency trading to the mix--which accounts for more than 70 per cent of daily volume--and a normal correction can quickly turn into a major crash. The high-speed computers make millions of trades in a flash without human intervention. The potential for a catastrophe like Thursday, is a near-certainty.
"Guys are getting carried out on stretchers"
From the Wall Street Journal:
"An electronic trading algorithm issued by an unknown trader caused a massive selloff in futures contracts tied to the S&P 500, according to a long-time electronic trader of the products. A mistaken order was issued to sell $16 billion, rather than $16 million, of e-mini S&P futures contracts, according to the person….
“Jay Suskind, a senior vice-president at Duncan-Williams Inc., said the combined string of negative news about Goldman Sachs Group Inc. (GS), the Greek debt crisis and the rise in Libor evoked memories of the
by ilene - April 27th, 2010 6:59 pm
Courtesy of The Pragmatic Capitalist
State Street’s latest sentiment index for institutional investors is showing a substantial aversion to risk as the market soars and sentiment spikes to extreme optimism. The index dropped to 99.7 from 107.4. North America is now the only region showing continued optimism and increased allocation towards equities. Europe declined to 95.9 while Asia declined to 94.2. The latest reading implies that strong economic growth has already been priced into equities and risk reduction is now warranted.
From State Street:
InvestorConfidence fell 7.7 points to 99.7 from March’s revised reading of 107.4. Declines in sentiment in North America were a key contributor, with institutional investor confidence falling 6.7 points from 110.4 to 103.7. Among Asian investors, too, confidence was lower, falling 6.5 points from 100.7 to 94.2. European institutions bucked the trend, as the reading for that region rose 1.2 points from 94.7 to 95.9.
Developed through State Street Global Markets’ research partnership, State Street Associates, by Harvard University professor Ken Froot and State Street Associates Paul O’Connell, the State Street Investor Confidence Index measures investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors. The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities, the higher is risk appetite or confidence It is based on actual trades rather than survey data, and as a result it captures the sentiment of institutional investors with unique precision.
“This month we saw institutional appetite for risk wane slightly, as volatility bounced back from the extremely benign levels seen in March,” commented Froot. “This was especially true towards the latter half of April. While institutions appear to have anticipated much of the improvement in economic prospects over the last six months, and allocated their portfolios accordingly, this month they displayed some increased caution about making further equity allocations. It remains to be seen whether this is a temporary pause, or an indication of a shift in the central theme of the last year.”
“The pattern of equity allocations this past month shows some interesting trends. Institutions have been building back up their
by ilene - April 19th, 2010 3:08 pm
Courtesy of The Pragmatic Capitalist
Let me close with this thought. My father grew up in the Great Depression. Like so many of his generation, he was shaped by sacrifice – hardened by economic hardship and war – keenly aware of the financial recklessness that made his life so much harder than it needed to be. His generation learned the lessons of financial disaster so that the country could avoid it for decades. Let us learn the lessons of our time. Let us be diligent and thoughtful today, so that our financial and economic system can rebound fully, and enrich and sustain the Americans of tomorrow.
- Phil Angelides
I think we are all fairly well versed in the various causes of the financial crisis by now. This was a widespread break-down of the entire financial system. Consumers got greedy, the banks got greedy, the government stopped enforcing the rules (or dismantled them altogether) and monetary and fiscal policy broke down on several levels. I’ve spent a great deal of time here talking about the consumer break-down and how Americans spend more than they make and are generally fiscally irresponsible. Fortunately, the consumer is de-leveraging and continues to reshape and improve their balance sheet. Hopefully, this is a continuing trend. Corporations have also been very effective in reducing leverage and paying down debt. One of the few bright spots in all of this is that U.S. corporations remain quite robust. Unfortunately, the monetary and fiscal response has been similar to what caused this crisis, but that is a mess derived from years of misunderstood (in my opinion) and backwards thinking with regards to our monetary system. That is something that can only be resolved with time and education. What remains entirely unresolved, however, is financial regulatory reform. It’s time that we update our antiquated regulatory system and install a system that ensures the Enron banking system is contained.
Since the early 1980’s we have been slowly breaking down the regulatory system that helped the United States avoid a major financial crisis for almost 60 years. As banks have evolved and financial innovation has grown the regulators have failed to keep pace. As big banks and corporations sought to maximize profits…
by ilene - March 9th, 2010 6:37 pm
Well, well, well, karma works in mysterious ways. – Ilene
Courtesy of JESSE’S CAFÉ AMÉRICAIN
It will be interesting if Asia and South America pick up this theme of banning the Wall Street banks on ethical considerations.
The cheating going on in the financial markets is really getting to be outrageous.
Europe bars Wall Street banks from government bond sales
By Elena Moya
Monday 8 March 2010 21.36 GMT
European countries are blocking Wall Street banks from lucrative deals to sell government debt worth hundreds of billions of euros in retaliation for their role in the credit crunch.
For the first time in five years, no big US investment bank appears among the top nine sovereign bond bookrunners in Europe, according to Dealogic data compiled for the Guardian. Only Morgan Stanley ranks at number 10.
Goldman Sachs doesn’t make the table. Goldman made it to number five last year and in 2006, and number eight in 2007, the data shows. JP Morgan was in the top ten last year and in 2007 and 2006 but doesn’t appear this year.
"Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit," said Arlene McCarthy, vice chair of the European parliament’s economic and monetary affairs committee. "It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments."
European sovereign bond league tables are now dominated by European banks such as Barclays Capital, Deutsche Bank, and Société Générale, the Dealogic table shows. Their business model is usually seen as more relationship-based, while US investment banks have traditionally been focused on immediate deal-making. (A euphemism for customer face-ripping – Jesse)
Being left out of government bond sales means missing out on one of the top fee-earning opportunities this year, given the relative drought in mergers and acquisitions and stock market flotations. Western European governments need to raise an estimated half a trillion dollars this year to refinance debts and pay for bank bailouts and rising unemployment….
by ilene - February 13th, 2010 5:02 pm
Guest author David Merkel discusses a topic we touched on the other day, via Tim Iacono’s article questioning L. Randall Wray’s essay on why government debt doesn’t matter. L. Randall’s argument seemed like a smoker’s defense of his habit on the basis of not having died yet. David’s article takes a longer term perspective. - Ilene
Debt levels in an economy matter. They matter a lot. An economy that is financed primarily by debt can be like a chain of dominoes. If one fixed claim fails, and it is large enough, many other fixed claims that rely on the first claim could fail as well, triggering a chain of failures. This is a reason why a fiat-money credit-based economy must limit leverage particularly in financial institutions.
Why financial institutions? They borrow and lend. They also lend to other financial institutions. A big move in the value of some assets can make many banks insolvent, and perhaps banks that lent to other banks. The banks should have equity bases more than sufficient to absorb losses at a 99% probability level. That means that leverage should be a lot lower than it is now.
Economies are more stable when they limit fixed claims and encourage financing via equity rather than debt. Imagine what the economy would be like if interest was not deductible from taxable income, but dividends were deductible.
- People would save money to buy homes, and would put more money down when they borrowed.
- Corporations would lower their debt-to-equity ratios, and would pay more dividends.
- Fewer people and corporations would go broke.
Pretty good, but in the short run, the economy would probably grow slower. The debt bonanza from 1984-2006 pushed our economy to grow faster than it should have, where people and firms took more chances by borrowing more, and making the overall economy less resilient. Debt-based economies lose resilience.
What was worse, the Federal Reserve in the Greenspan and Bernanke years facilitated the debt increases because the Fed never took away the stimulus fast enough, and offered stimulus too rapidly. This led to a culture of unbridled debt and risk-taking. If only:
- Greenspan had been silent when the crash hit in October 1987.
- Greenspan had not given