by ilene - February 23rd, 2011 2:34 am
Courtesy of The Daily Bail
Citigroup ignored warning signs of Bernard L. Madoff’s Ponzi scheme, and a bank executive knew the con man’s stated trading strategy couldn’t generate the reported returns, the trustee liquidating Madoff’s firm said in a lawsuit.
The unidentified Citibank executive, who was responsible for making recommendations to clients on derivatives, “concluded” by June 2007 that returns reported by a Madoff feeder fund, Fairfield Sentry Ltd., couldn’t have come from the strategy, trustee Irving Picard said in a complaint unsealed yesterday. The executive reached his conclusion after meeting with analyst Harry Markopolos, a whistleblower who also alerted U.S. regulators to the fraud, Picard said.
The Citibank official later communicated with Markopolos orally and in writing, specifically discussing the fraud before the Ponzi scheme was exposed in December 2008, Picard alleged.
“Citi knew, and was on notice of, irregularities and problems concerning the trades reported by BLMIS, and strategically chose to ignore these concerns in order to continue to enrich themselves,” Picard said in the complaint, referring to Madoff’s firm, Bernard L. Madoff Investment Securities LLC.
Picard laid out in the complaint details of a lawsuit he filed under seal in December against New York-based Citigroup and other banks. He is demanding $425 million from Citigroup – money it received “in connection with” a loan to a Madoff feeder fund and a swap transaction with a Swiss hedge fund linked to a second feeder fund, Picard said.
We first got an inkling of Picard’s filing from this Bloomberg story in December.
Citigroup, Bank of America Sued by Madoff Trustee
Citigroup Inc.’s Citibank, Bank of America Corp.’s Merrill Lynch unit and five other banks were sued by the trustee liquidating Bernard Madoff’s firm to recover more than $1 billion for the con man’s defrauded customers.
The banks, which include Natixis SA, Fortis Prime Fund Solutions Bank (Ireland) Ltd., ABN Amro Bank NV, Nomura Bank International Plc. and Banco Bilbao Vizcaya Argentaria SA, received money through Madoff feeder funds when they knew, or should have known, that Madoff’s investments were a fraud, the trustee, Irving Picard, said yesterday in a statement.
Picard, who faces a two-year legal deadline that runs out Dec. 11, has filed hundreds of suits in the past month, seeking more than $34 billion from banks, feeder funds, investors and others alleged to have profited from Madoff’s decades-long Ponzi scheme, the biggest in…
by ilene - October 26th, 2010 2:41 am
Courtesy of James Howard Kunstler
The latest version of Pretend – going on a couple of weeks now – is the nation whistling past the graveyard of mortgage documentation fraud while skeletons dance around everything connected with the money system. Halloween came early this year. The USA is getting to look like one big Masque of the Red Death, so I suppose it’s convenient that our pop culture has been saturated with vampires, zombies, and werewolves for a decade, coincident with the self-cannibalizing of our economy. Something in the zeitgeist told us to get with the program of a twilight existence. We’re well-schooled now in the ways of the undead, operating under cover of darkness, going for the neck at every opportunity, even eating our young – if you consider the debt orgy, both private and public, as a way to party like it’s 1999 by consuming your children’s’ future.
The big banks leading the charge of the anthropophagi are making like it’s no big deal that notes representing money lent have become mysteriously dissociated from the mortgages that secure them. In the good old days, these things traveled in pairs, like boy-and-girl, Laurel and Hardy, a horse and carriage. It made for straight-forward property transfers, where Person A could be confident he was buying something free and clear from Person B. What a quaint concept, free and clear!
Nowadays, these documents can hardly be located at all – not such a surprise, really, since they were ground out like e-coli infested bratwursts in strip-mall boiler rooms run by former used car salesmen, and pawned off wholesale (literally) on banks who served them up sliced-and-diced, sloppy Joe style, on CDO buns to credulous pension funds, cretinous insurance company yobs, double-digit IQ college endowment managers, and other such nitwits bethinking themselves the reincarnation of Bernard Baruch, not to mention foreign sovereign nations who bought this smallpox-blanket-grade investment paper by the container-ship-load and, finally, the innovative geniuses at the very banks who engineered the stuff and got stuck with tons of it themselves when, as they say, the music stopped.
The Big Picture looks even worse when you figure in the mischief of so-called synthetic CDOs that represent the multiple securitizations of single underlying mortgages – God knows how many times each – which mean,…
by ilene - October 12th, 2010 5:56 pm
Courtesy of The Pragmatic Capitalist
In February of 2009 John Hussman wrote a letter that stood out to me. He discussed the very depressed valuations and the likelihood of 9-11% 10 year returns. This was a big change for Mr. Hussman and a very healthy 10 year return by any standard. What no one expected, however, was that we would get most of that 10 year return in just 10 months.
In his latest letter Mr. Hussman updated his valuation model. It’s not nearly as optimistic:
Total annual return = (1+g)(Yoriginal/Yterminal)^(1/T) – 1 + (Yoriginal+Yterminal)/2
As it happens, the long-term growth rates of S&P 500 dividends, earnings (measured peak-to-peak across economic cycles) and other fundamentals have been remarkably stable for more than 70 years, at about 6% annually, with very little variation even during the inflationary 1970′s. Even if one includes the depressed yields of the bubble period, and restrict history to the post-war period, the median dividend yield is 3.7%. Thus, a reasonably good estimate of future 7-year total returns for the S&P 500 is simply:
Total annual return = (1.06)(Yoriginal/.037)^(1/7) – 1 + (Yoriginal + .037)/2
At a 2% dividend yield, this estimate is currently -0.07%.
For historical perspective, the chart below presents the 7-year projected total returns obtained in this manner in blue. The actual subsequent 7-year total return for the S&P 500 is depicted in green. Notice that the performance of this method deteriorated significantly after about 1988, reflecting the fact that terminal yields 7 years later began to depart dramatically from prior historical norms.
The last 15 years have been skewed to the upside as the U.S. government has attempted to generate a capitalist market where losers never lose. In other words, valuations have been inappropriately bolstered by the government’s constant tinkering in the markets:
“The difference between the green line and the red line represents the effect of bubble valuations. Had it not been for a period of sustained bubble valuations (which ultimately proved themselves to be bubble valuations by creating a 13 year period of dismal subsequent returns), we find that the yield-based model above would have extended its admirable historical record.
This creates a terrible problem for investors here. Given that the yield on the S&P 500 is now below 2%, it is essential for investors
by ilene - October 8th, 2010 12:56 pm
Courtesy of Data Diary
There is something of a speaking-in-tongues fervour about the place recently. Bring back big hair, smelly armpits and the Doobie Brothers I say. We all need a little peace, love and skyrocketing oil prices. (If you want a 1973 vintage backtrack to this post – Jesus is Just Alright here.)
To distil a few themes from the cacophony:
1) When money is cheap, speculation is abundant. And it doesn’t get any cheaper than when the government is giving it away. The end is nigh when the suspension of disbelief can’t be sustained. That is when investors will want out – it’s every Ponzi scheme’s dilemma. We aren’t there yet.
2) Inflation is the destination, we just don’t know whether we will get there. The Fed will stop at nothing in their pursuit of inflation, but they can’t control where liquidity flows. They want wage inflation. They think by spurring asset price inflation it will lead to rising inflation expectations and then onto real incomes. The problem is that consumables may just explode in the meantime – what good is a few dollars saved on mortgage repayments when your cost of living has gone through the roof.
3) Corporate margin expansion has reached its peak. The majority of margin expansion since 2000 has come via the wage bill. Absent productivity gains, this is a finite trend. The Fed says they want wages to increase relative to everything. Labour winning over capital is not multiple friendly.
4) Last chance to buy cheap goods from China. It’s revalue the Yuan or cop tariffs. Either which way, the days of ridiculously cheap goods from China are near an end.
5) Commodities supercycle is likely to go parabolic. The flight from paper money to real assets has been gathering steam. With the financialisation of commodity derivatives, this trend can run to unprecedented extremes (for those not familiar with the term, it means ‘hasn’t happened before’). Should China ease credit again – which is a fair bet given the impending hit they will take on exports – capital investment will be sucking at the physical market at the same time. That sounds like a recipe for a party.
by ilene - October 5th, 2010 11:06 pm
Courtesy of The Pragmatic Capitalist
This weekend’s shocking admittal that the Fed is hoping QE will keep
Brian Sack, a senior official at the New York Fed, had this to say about the powers of quantitative easing in a speech he just delivered:
“Some observers have argued that balance sheet changes, even if they influence longer-term interest rates, will not affect the economy because the transmission mechanism is broken. This point is overstated in my view. It is true that certain aspects of the transmission mechanism are clogged because of the credit constraints facing some households and businesses, and it is true that monetary policy cannot directly target those parties that are the most constrained. Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be. It seems highly unlikely that the economy is completely insensitive to borrowing costs and wealth, or to other changes in broad financial conditions. ”
I just love that one comment to the effect that QE “adds to household wealth by keeping asset prices higher than they otherwise would be.” When will these guys ever learn that maybe, just maybe, these Fed policies aimed at targeting asset prices at levels above their intrinsic values is probably not in the best interests of the nation? As our friend Marc Faber likes to say, the “Bernanke put” is cut from the same cloth as the fabled “Greenspan put” — only the strike price is different.
Imagine running a policy aimed at getting people to spend money based on an artificial level of asset values — what an admission. Then again, this is what the Fed has been all about since the LTCM bailout of 1998. We’re still not convinced after reading this sermon that this next “pull-another-rabbit-out-of-the-hat” experiment is going to end with very much success. There is something to be said about paying for our mistakes and to have the Fed try to rekindle an asset-based economy that has only ended up in generating a series of burst bubbles over the last 12 years, not to mention encourage a lifestyle of living beyond our means,
by ilene - September 5th, 2010 3:25 pm
Things are looking grim indeed for the US economy. Unemployment is out of control—especially if you consider the U-6 (16.7%, up 0.2% in the last month) and Shadowstats (22%, up 0.3%) measures, which are far more realistic than the effectively public relations U-3 number that passes for the “official” unemployment rate (9.6%, up 0.1%).
The US is in a Depression, and the sooner it acknowledges that—rather than continuing to pretend otherwise—the better. Government action has attenuated the rate of decline, but not reversed it: a huge fiscal and monetary stimulus has put the economy in limbo rather than restarting growth, and the Fed’s conventional monetary policy arsenal is all but depleted.
This prompted MIT professor of economics Ricardo Cabellero to suggest a more radical approach to monetary easing, in a piece re-published last Wednesday in Business Spectator (reproduced from Vox). Conventional “Quantitative Easing” involves the Treasury selling bonds to the Fed, and then using the money to fund expenditure—so public debt increases, and it has to be serviced. We thus swap a private debt problem for a public one, and the boost to spending is reversed when the bonds are subsequently retired. Instead, Caballero proposes
a fiscal expansion (e.g. a temporary and large cut of sales taxes) that does not raise public debt in equal amount. This can be done with a “helicopter drop” targeted at the Treasury. That is, a monetary gift from the Fed to the Treasury. (Ricardo Caballero)
The government would thus spend without adding to debt, with the objective of causing inflation by having “more dollars chasing goods and services”. This is preferable to the deflationary trap that has afflicted Japan for two decades, and now is increasingly likely in the US. So on the face of it, Cabellero’s plan appears sound: inflation will reduce the real value of financial assets, shift wealth from older to younger generations, and stimulate both supply and demand by making it more attractive to spend and invest than to leave…
Eliot Spitzer: “The Federal Reserve Is A Ponzi Scheme” (Inside The Fed’s Secret Pile Of Trash With Ratigan, Spitzer & Toure)
by ilene - August 17th, 2010 8:08 pm
Eliot Spitzer: "The Federal Reserve Is A Ponzi Scheme" (Inside The Fed’s Secret Pile Of Trash With Ratigan, Spitzer & Toure)
Courtesy of The Daily Bail
An outstanding discussion, primer and visual lesson on toxic assets, failed banks, the Federal Reserve, HR 1207, auditing the Fed, and you, the f*cked taxpayer. Don’t miss this clip and then send it to someone else. Pay it forward until we have millions of f*cked taxpayers who will at least be informed. Awareness is our only chance.
More green shoots from Dylan Ratigan’s awesome new show. Dylan puts on his Banker hat and swaps a (literal) bag of trash, on-air, for $13.9 Trillion worth of Monopoly money from a guy wearing a "Fed" hat. Dylan then explains why we should support Ron Paul’s Audit of the Fed (HR 1207) and explains in plain and simple terms how we have been screwed by the Fed’s bailout of the banks. This is really good stuff. I can’t help but admire Ratigan for what he’s doing with the new show. From our perspective, it just gets better and better. Here are just two of several choice morsels from this clip:
- "The Federal Reserve just extended $14 Trillion of our money, our children’s money, America’s future…and now they don’t want to talk about what’s in the bag. And they did it because the banks created a garbage bag full of bad debts." (4:45)
- "I feel as if America has suffered the greatest theft and cover-up — ever, … where banks created a pile of garbage, that they paid themselves billions of dollars in personal compensation, and then stuck the trillions of dollars worth of garbage with the American taxpayer. That, to me, is stealing." (7:05)
by ilene - July 29th, 2010 9:47 am
Courtesy of Tyler Durden
In an interview conducted with Business Week, Nassim Taleb discusses his view of the biggest black swan in the market currently, and isn’t shy to call government debt a "Pure Ponzi scheme." – When asked where he the biggest potential source of systemic fragility is, he responds: "The massive one is government deficits. As an analogy: You often have planes landing two hours late. In some cases, when you have volcanos, you can land two or three weeks late. How often have you landed two hours early? Never. It’s the same with deficits. The errors tend to go one way rather than the other. When I wrote The Black Swan, I realized there was a huge bias in the way people estimate deficits and make forecasts. Typically things costs more, which is chronic. Governments that try to shoot for a surplus hardly ever reach it. The problem is getting runaway. It’s becoming a pure Ponzi scheme. It’s very nonlinear: You need more and more debt just to stay where you are. And what broke Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers." Alas, Taleb is wrong: Ponzi or not, today’s UST auction will likely once again come at a multi year high Bid To Cover as the suckers (especially those who recycle Fed discount window money) just refuse to go away.
Q: The new edition of The Black Swan includes what you call "10 principles for a Black-Swan robust society." One of them is: "Citizens should not depend on financial assets as a repository of value and should not rely on fallible ‘expert’ advice for their retirement." Can you explain what you mean?
Taleb: The problem is that citizens are being led to invest in securities they don’t understand by people who themselves don’t quite understand the risks involved. The stock market is probably the best thing in the world, but the true risks of the stock market are vastly greater than the representations. And this leads to extremely strange situations in which, say, someone has a bakery, is extremely paranoid about suppliers, very careful about risks, and protects his business with appropriate insurance. Then, at some point,…
Ponzi “Shark Loans” Fuel China’s Housing Bubble; Home Sales Plunge 44% in Xiamen; Bubble Busts in Tianjin
by ilene - July 21st, 2010 3:09 pm
Ponzi "Shark Loans" Fuel China’s Housing Bubble; Home Sales Plunge 44% in Xiamen; Bubble Busts in Tianjin
Courtesy of Mish
China’s property bubble is now on the verge of collapse. Transaction volumes are significantly down and declining volume is how property bubbles always burst. In simple terms, the pool of greater fools eventually runs out.
In China’s case, the pool of fools is heavily involved in "loan shark" schemes where speculators hope property values rise fast enough to cover the interest.
Ponzi Loan Shark Operations Fuel Bubble
In this article we will show how the ponzi shark loan scheme works and why we think the regime in China will fall. Our research is based on sources INSIDE CHINA
This is how this Ponzi scheme works:
Local officials, [required by] the government to produce double digit GDP growth numbers, give real estate developers permits to build housing projects in return for bribes. They also get bribes in return for allowing the shark loan companies to operate under their jurisdiction. Some of them are active partners in shark loan businesses. Every scheme has a ring leader whose job is to collect money from all the participants in the Ponzi scheme. When some of these Ponzi schemes blow up, the party leaders always get bailed out first.
Most of the funds that are collected in this classic Ponzi finance go to local land purchases and real estate development. Part of the funds are used in order to pay back the rolling loan. The short term interest rate in this black market is very high and ranges between 20%-150% annual rate. The sources of the Ponzi funds are diverse, as ordinary citizens, banks with corrupted bank officials, and state enterprises play the game.
A reader wrote to us this email two weeks ago, which triggered our in depth research:
“My hometown is Zhejiang, now I live in shanghai, my sister pledged her home to bank, she lived in Hangzhou, she bought her home around 500,0000rmb five years ago, now her home worth 2 million RMB, so she can get huge loan from bank, she gave this loan to a shark loan company with 30% return every year, she has been doing and living on this for 4 years, she is a middle school
by ilene - July 2nd, 2010 7:11 pm
Courtesy of Karl Denninger at The Market Ticker
Keep up the lying, legislators, about how it’s all "those other guys" fault…..
Yesterday gave me the opportunity to update this chart with an extrapolated forward number for this year through the first six months.
Yeah, tell me it’s all the Republicans’ fault. Or all the Democrats’.
Our government refuses to deal with the facts - there is no recovery in the private economy, there has been no recovery; private final demand collapsed in 2008 and has not come back one iota and the Feral Government is LYING – on both sides of the aisle.
You want a stock market crash and economic collapse Mr. Grayson? Mr. Reid? Ms. Pelosi? Mr. McCain? Mr. Hoyer? Mr. Issa? Mr/Ms (Pick a name)?
You’re going to get one and the longer you keep this crap up the worse it’s going to be.
Want to argue with me? Go ahead and try – argue with the math. Tell me how we can keep doing what we’re doing, and for how long. How long we can borrow and spend 10, 11, 12% of GDP on an annual basis before those who fund our national credit card say this:
Are you in Congress and the White House so damned arrogant as to think that this can’t or won’t happen? What are you going to threaten people with? 6,000 nuclear weapons? For what? Refusing to fund an ever-spiraling higher Ponzi Scheme? For how long will that game work? Can such a threat be effective beyond the mathematical limits of capacity, even if the leaders of said nations want to continue doing so?
Here’s reality folks: We’ve written checks for 30 years with our political mouths we cannot cash with our producing fingers. We’ve papered over this with fraud in virtually every nook and cranny of public and private life. We have allowed producers to depart for lands where effective slavery exists for labor, refusing to enact parity tariffs to put a stop to it. We have allowed blatant and outrageous theft of our producers’ intellectual property and conferred upon these nations "most-favored nation" trading status. We have blown serial bubbles in the stock and housing markets and would love to blow another one in "carbon trading", but all three were and are frauds without foundation in reality – or sustainability.
Jeff Immelt, GE’s Chief Executive, came out today…