Yes, $2 billion in the scheme of JPM Chase’s book and quarterly earnings is tiny, a ‘trading blip’ as it’s been called by some business press. But that’s not a mitigating factor in what it represents. In this era dominated by a few consolidated and complex banks, the very fact that it’s a relatively small loss IS the red flag.
First - because the loss could (and will) grow. Second, because even if it doesn’t, it’s a blatant example of a big bank incurring un-due risk within barely regulated, highly correlated financial markets. It only takes another Paulson hedge fund, or a trading desk at Goldman Sachs, to short the hell out of the corporates that JPM Chase is synthetically long, or take whatever the other side really is, to create a liquidity crisis that will further screw those least able to access credit – individuals, small businesses, and productive capital users.
We know this. We’ve seen this. We're in this. There’s no such thing as an isolated trading loss anymore. And yet Jamie Dimon, seated atop the most powerful bank in the world, has smugly led the charge to adamantly oppose any moves to alter the banking framework that allows him, or any bank, to call a bet - a hedge or client position or market-making maneuver - with central bank, government official, and regulatory impunity.
Flashback to the unimaginable in 1933
It’s 1933 and the country has undergone several years of painful Depression following the 1920s speculation that crashed in the fall of 1929. Investigations into the bank related causes began under Republican President, Herbert Hoover and continued under Democratic President, FDR.
Okay, that’s pretty common knowledge. But, here’s something that isn’t: of all the giant banks operating their trusts schemes and taking advantage of off-book deals, and international bets in the late 1920s, it was an incoming head of Chase (replacing Al Wiggins who shorted Chase stock in a network of fraud) that advocated for Glass-Steagall. Indeed, despite all pedigree to the opposite (his father was Senator Nelson Aldrich architect of the Federal Reserve and brother-in-law, John D. Rockefeller), Chase Chair, Winthrop Aldrich, took to the front pages of the New York Times in March, 1933 to pitch decisive separation of commercial and speculative activity arguments. Fellow bankers hated him.
His motives weren’t totally altruistic to be sure, but somewhere in his calculation that Chase would survive a separation of activities and emerge stronger than rival, Morgan Bank, was an awareness that something more – permanent – had to be put in place if only to save the banking industry from future confidence breaches and loss. It turned out he was right. And wrong. (much more on that in my next book, research still ongoing.)
Financial history has a sense of irony. JPM Chase was the post-Glass-Steagall repeal marriage, 66 years in the making, of Morgan Bank and Chase. Today, it is the largest bank in America, possessing greater control of the nation’s cash than any other bank. It also has the largest derivatives exposure ($70 trillion) including nearly $6 trillion worth of credit derivatives.
It is the size of a bank holding company’s deposits that dictates the extent of the risk it takes, risk ‘models’ not withstanding: the more deposits, the more risk, the more potential loss. JPM Chase is not alone in using its position as deposit taker to increase speculation, but it has more to play with.
And the more access to other people’s money, the greater the gambling incentive. The largest banks hold deposits (our deposits) hostage in the global game of financial warfare. Related access to capital and bailouts are enabling weaponry in the fight for worldwide insitutional supremacy.
The Alleged Hedge
Now, consider JPM Chase’s alleged ‘hedge’ itself; a trading position taken in the London department, the chief investment office, set up to allegedly protect the bank’s overall book and ‘invest’ its excess capital. Any investment is a bet. A hedge is supposed to mitigate loss if the bet fails. An investment is not a hedge.
Let’s pretend for a moment that banks were about simple conventional - banking – taking deposits and making loans. In that context, it would be nonsensical to hedge loan risk by pouring on more loan risk, or put out a fire by pouring fuel on its flames.
In other words, if a bank lends money to, say Boeing, it accepts a rate, in return, more or less related to its assessment of the risk involved in getting its money back, which translates into an interest payment. To hedge that payment, a bank could purchase ‘insurance’ or ‘protection’ from a counterparty solvent enough to make good on any shortfall in Boeing’s ability to pay its interest, or in the event of an Boeing default. What is not a hedge for the loan, is further exposure to the risk that Boeing could default. Yet, in a more complex manner, that’s exactly what happened here.
By engaging in a trade that tied up 15% of its assets, or $350 billion, no matter what label that trade received, the Whale man and his managers (leading up to Jamie Dimon), went long credit risk by shorting an index of synthetic credits, thereby placing the bank in the position of paying out, or losing money, if those credits deteriorate. In effect, and super-simplistically, it doubled down. In its more complex form, the firm took a short position in an index of credit default swaps representing 125 North American investment grade corporations (including Boeing), called the CDX.NA.IG.9. The index reference of underlying corporates has been diving in price, hence the loss - and mounting loss to JPM.
Deception and Delusion
Going long the corporate credit market while still immersed in the fallout of having been long the European sovereign and US real estate market, demonstrates the same cluelessness about the economy and financial system prevalent in the media and in Washington every time the words ‘slow recovery’ rather than something to the effect of ‘prolonged, continued, enduring depression’ are uttered.
In such a charade, why wouldn’t JPM Chase, a bank existing on an array of federal largesse, and Jamie Dimon who was re-voted to Class A NY Fed Director, the position he held during the 2008 crisis, in early 2010 – rubber stamp a bet that corporate economic health is a foregone conclusion.
It was under that same misplaced, other people’s money optimism and hubris that MF Global stole (or for the apologists, ‘mistakenly took’) $1.6 billion of its segregated customers' money to stay in a bad bet. Former MF Global CEO, the ‘honorable’ Jon Corzine’s bet was that certain European sovereign credits would improve. Only they didn’t. Not in time for his margins to hold out.
It’s more than ironic, that JPM Chase, the bank still entangled with MF Global customer money, took the same bet, albeit with different credits and is trying to pawn it off as an ‘egregious’ mistake, a blip on the radar of an otherwise pristinely risk-managed bank.
It’s also supremely annoying that Dimon is right about something, that the Volcker Rule wouldn’t necessarily apply to this ‘hedge.’ There’s nothing particularly wrong with the Volcker Rule; it will mitigate some fraction of risk, though given the SEC and Fed’s inability to understand what risk is, it’s unlikely they’ll take the mental leap to segment trades as mitigating it, or not. Yet, the Volcker Rule will not change one fundamental pillar of global systemic risk – as long as banks are not segregated ala Glass Steagall along deposit-taking / loan-making vs. speculation lines, they will have access to capital to burn. And burn it they will.
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I applaud Smith's decision to bring the nature of Goldman's profit-making strategies to the forefront of the global population's discourse, as so many others have been doing through books, investigative journalism, and the Occupy movements over the past decade since my book, Other People's Money, was written after I resigned from Goldman. It would be great if Smith's illuminations would serve as the turning point around which serious examination and re-regulation of the banking system framework would transpire.
The inherent conflict of interest that firms such as Goldman possess through enjoying the multiple roles of 'market-maker,' 'securities creator' and 'client-advisor' foster an environment rife with systemic risk. The trading revenue portion of Goldman's profits, as well as its derivatives vs. assets ratio, is the highest amongst the American bank holding companies. And yet, in the fall of 2008, the Federal Reserve approved Goldman Sachs (along with Morgan Stanley) to alter its moniker from investment bank to bank holding company, thereby allowing it to gain access to federal subsidies and potential ongoing support.
In this regard, the firm's practices should remain under intense scrutiny by the general public and legislators. I would hope that the message behind Smith's resignation will not be obfuscated by debates over the extent to which the firm's clients are either supported or exploited, but instead, serve as a powerful call to foster a more-strictly delineated and less reckless financial system.
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Another commonality between the MF Global incident and Animal Farm is the abject rewriting, or re-interpretation, of rules. At the farm, the rule ‘No animal shall drink alcohol” was ultimately ‘re-remembered’ as ‘No animal shall drink alcohol to excess.’ Absent opposition to this particular fact alteration, the pigs got drunk. It wasn’t pretty.
The Orwellian nature of finance is spiraling out of control. It was acutely demonstrated during the fall 2008, merge-and-be-bailed period, and subsequently, through mainstream acceptance that “too big to fail” validates the subsidization of reckless banking practices (bail first, ask questions or consider tepid regulation later), and the European debacle.
Three wrinkles of audacity underscore the potential MF Global bonus approvals. First, there is the moral responsibility layer. MF Global, classified as a broker-dealer wasn’t specifically subject to the investment-advisor fiduciary rule that requires ‘systemic safety and soundness’’ with respect to retail customers. But, comingling customers’ funds inappropriately with the firm’s, as former chief, Jon Corzine’s European bets were blowing up, was an abject misinterpretation of the rule's intent.
Aside from that, MF Global lied about funds segregation to its customers, which constitutes fraud. The final page of the firm’s brochure touts “the strict physical separation of clients’ assets from MF Global accounts.”
Separately, MF Global broker-dealer activities were subject to SEC oversight and restrictions on its use of client funds. During any normal investigation, like say for embezzlement, funds should be frozen until issues are resolved. Releasing any bonus pay until this matter is settled is just plain wrong.
The reason for possibly allowing bonuses for MF Global chief operating officer, Bradley I. Abelow, finance chief, Henri J. Steenkamp, and general counsel, Laurie R. Ferber follows the same twisted logic pervading Wall Street: no one else can do the job as well.
These people are apparently so special that despite incompetence, negligence or potential malfeasance in diverting customers’ funds away from their rightful spots, their expertise is critical to the bankruptcy proceeding. In that realm, their ‘job performance’ will help Freeh "maximize value for creditors of the company”. Translation: it will ensure banks like JPM Chase keep their cut, since customers are not creditors. Again, plain wrong.
But forget simple matters of right and wrong for a moment. After all, this is Big Finance: what's most important is not necessarily what’s legal or illegal, but more practically, what you can get away with and what you can’t. In that regard, the sheer impotence of regulators, the Department of Justice, and the FBI are enabling factors in perpetuating financial crimes.
In early 1933, during the Depression that followed the 1929 Stock market Crash, Democratic president, FDR and Republican Treasury Secretary, William Woodin, declared a bank holiday, during which Treasury Department agents examined banks’ (which included at the time, broker-dealers) books to determine solidity and solvency.
Today, our regulatory bodies are incapable, or simply don’t want to be bothered with, tracing money and returning it to the public customers to whom it belongs. The inability to independently examine MF Global’s books, without its executive involved, reveals the sorry state of our financial system. In this post-Glass-Steagall-repeal world, the mixing of customer money and speculative betting – whether at a super-market bank or broker-dealer, whether involving subprime loans packages or European Sovereign debt, poses too dangerous a level of complexity. If regulatory bodies can’t, or won’t, diminish the related risk, more concrete Glass-Steagall boundaries throughout the financial framework should be resurrected.
Meanwhile, two senators have taken on the bonus-pay fight. Senator Amy Klobuchar (D., Minn.), member of the Senate Agriculture Committee investigating MF Global, wrote to Freeh that the plan is "unacceptable." Senator Jon Tester (D., Mont.), whose constituency includes a number of farmers with funds in the ‘missing’ category, called it "outrageous.”
On Sunday, Freeh's spokesperson released a statement saying the senators’ concerns were ‘noted’ and a final decision on the bonuses hadn’t been made. But to the extent that the money trails shrouding MF Global’s final moments remain more apparent to its former employees than external examiners, it’s likely the people involved in the wreckage, will be paid extra for sorting thru it. And, that’s an expensive, outrageous, shame.
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In Los Angeles, traveling eastward on Santa Monica Boulevard, you pass the mansion-laden enclave of Beverly Hills on your left, and a less ornate stretch of police and office buildings on your right. While we were driving, the driver revealed a mark of inequality, seemingly secret and trivial, and yet so significant.
“See that,” he gestured to a sprawling, perfectly manicured estate. “People that order a taxi from there to the airport, pay a flat rate of $30. But over there,” he points to my right, “you’re on the meter. Forty-five bucks.”
He shook his head, “They make 100 times more in those homes than what other people make. You tell me why the people with all the money get the cheaper fare.”
The answer was the line connecting the dots of the show I’d just taped. They reap the benefits, because they make, or buy, the rules. A half an hour earlier, Alonya and I had discussed four other dots.
The first was an FT piece that noted there had been no new bank applications in the United States in 2011, after only 3 in 2010. What does this mean? It means that it’s cheaper to acquire a bank with FDIC and Fed assistance, than to start a small one. Not only that, smaller banks can’t even raise the capital required to stake out a physical location. This, while mega-banks sprout like weeds on the corner of every block, capturing spacious street-front property, rolling out expensive signage, and able to negotiate better rents for their bulk presence. It is a sign of the small being crushed by the large; a situation whose side-effects include removing choice from citizens, who are left paying collusively high fees for ATM and banking services, at omnipresent, federally subsidized institutions.
The second dot was the excellent video, accompanying a petition, that Public Citizen just released called Breaking up is Hard to Do – aimed at Bank of America (but that could equally have been addressing any member of the too-big-to-fail contingent.) Alonya asked me what I thought of the video. I replied, “It’s not going to happen.” (These goliaths will remain joined at the commercial and speculative hip.) Not because it shouldn't, but because...
Our regulatory and legislative systems have been supremely indulgent of these behemoths. Here and there, the big banks emerge from settlements with fines for fraudulent practices, but it doesn’t make a dent in the risk they can manufacture, or the size to which they can grow. The Federal Reserve has ultimate regulatory authority over the big banks, and under Chairman Ben Bernanke, used that authority to approve, not reject mergers, to facilitate a cheap money party to fuel, what would otherwise have been insolvent financial giants, and to allow those same giants to re-funnel their subsidies back to the books of the Federal Reserve as excess reserves that gross .25% interest per year. Separately, the tepid Dodd-Frank Act gets watered down more each day. But even at its ‘strongest’ inception state, it didn’t break up the banks, nor reduce the risk they pose our global economy. Bank of America holds 35% MORE derivatives today than before the fall of 2008.
The third dot had to do with a billionaire index that Bloomberg created. It provides a closer to daily tracking of the wealth of the world’s 20 most ostentatiously wealthy. I don’t really know what to say about that. But, whoever gave the internal go-ahead to that monstrous showcase of inequality should have perhaps included a location-tracker, so people could send their daily heart-felt awe and congratulations.
The fourth dot was the income gain of the top 1% vs. the 99% over the past year. The fact that the top 1% captured 93% (basically almost all) of the growth demonstrates that the inequality gap isn’t just widening; it’s accelerating. The more one has, the greater the cushion to soften economic Depressions. It was no different going into the 1930s Great Depression as illustrated in my novel, Black Tuesday. If you’re living paycheck to paycheck, you feel each oppressive drop of an increase in health care, education, childcare, food, energy and utilities costs. If your income isn’t growing in tandem, you are comparatively falling further down an economic hole. This accelerated income-rise-to-the-top is one more sign that when the media and Washington say we’re in an economic recovery, they have an ultra-myopic definition of who constitutes ‘we’, and it’s not the majority of the population.
That’s why there’s an Occupy Movement. As I wrote on behalf of the compelling book, "The economic elite vs. the People," “Occupy Wall Street has coalesced across towns, cities, and countries. It represents people of every race, age, and disposition as the only meaningful opposition to a winner-take-all financial system that extracted untold wealth from the global population to puff up the personal portfolios of elite executives with impunity. And until a more equitable society and system prevail, the Occupy movement is not going anywhere.” (See the rest on www.ampedstatus.com)
All these dots and lines project a gamed world, where it is not sweat or merit that propels people forward, but connections and power and pedigree. Which brings me back to my cabbie friend. As he dropped me off, he offered this morsel of wisdom, “Things won’t change until we’re all paying the same fares. At least, that’s a start.”
]]>Despite no signs of the first bailout working – certainly not in growing the Greek economy or helping its population - but not even in being sufficient to cover speculative losses, Euro elites finalized another 130 billion Euro, ($170 billion) bailout today. This is ostensibly to avoid banks’ and credit default swap players’ wrath over the possibility of Greece defaulting on 14.5 billion Euros in bonds.
Bailout promoters seem to believe (or pretend) that: bank bailout debt + more bank bailout debt + selling national assets at discount prices + oppressive unemployment = economic health. They fail to grasp that severe austerity hasn’t, and won’t, turn Greece (or any country) around. Banks, of course, just want to protect their bets and not wait around for Greece to really stabilize for repayment.
Prior to the Great Depression, the Greek economy experienced years of growth, a healthy commercial activity spree, and like today, a stark increase in (less-leveraged) bank loans to finance it. When the Depression struck, banks and local businesses faced unpayable loans and declining asset values. (Stop me when this sounds familiar).
Credit constricted immediately, choking internal economic activity. In 1928, the Greek Drachma was tied to the gold standard, but pegged to the British pound. When Britain devalued its pound in 1931, the Greek government responded by raising public investments and pegging the Drachma to the US dollar.
But by early 1932, central bank reserves had fallen so much that they only backed 40% of Greek bonds. Even without the slow drip of rating agency downgrades to highlight this leveraged debt situation (which is nothing compared to say, today’s US reserves vs. debt leverage), the lack of reserves caused foreign speculators to fleece the Drachma/dollar exchange rate. Bond yields blew out. Borrowing costs shot up.
So in March 1932, the League of Nation’s (the precursor bank bailout entity to the ECB/IMF) agreed to provide a loan to service Greece’s debt in return for – wait for it - austerity measures. Unlike today, the government said ‘hell no.’ Instead, in April, 1932, it floated the Drachma - which devalued quickly. It also declared a public debt moratorium, and increased infrastructure spending to strengthen its economy. It negotiated repayment terms with creditors for overdue interest. By 1934, agriculture and industrial production rose, the currency was more stable, employment increased, and the budget balanced.
The situation is different now. Though national Greek banks registered relatively few domestic loan losses in 2009 ( a fact unrecognized by the bailout supporters), they did begin taking losses in their trading books due to various international bets. Their borrowing and margin costs rose sharply and quickly with each rating downgrade which increased their trade losses, and kept them from extending or renegotiating loans locally, which caused more economic pain for the population.
Greece would have been better off, had it not suffered a rapid series of downgrades and been pulverized by subsequent hot-money flight and pressure. Despite a clear warning from the Central Bank of Greece in late 2009 (when Greece was critical, but breathing) that it could sustain its costs if they didn’t rise egregiously, Moody’s (and later others) cut Greece’s sovereign debt rating from A1 to A2 in December, 2009. From that point on, the international banking community went into ravage mode, fast.
Moody's cut Greece’s debt again, to A3 in April, 2010, to Ba1 (junk) in June, 2010, and to B1 in March, 2011. Three months later, Greece’s rating was cut to Caa1. By September, 2011 the six biggest Greek banks were downgraded to Caa2, a smidge above default levels, crushing national credit flow to the population.
When any country is downgraded from single A to junk within 18 months, it has to issue more expensive debt to stay even, which by definition, makes the credit-worthiness of its bonds decline. As in any country, Greece's banks are big buyers of its government bonds. They also use those bonds as collateral for other borrowing and trades - with each other – and with international banks.
As Greek banks weakened and borrowing costs soared, their ability to buy Greek bonds from their own government diminished, which weakened the value of government debt. Circularly, Greek banks took further hits for holding the devalued Greek bonds and thus become weaker - further reducing their ability to sustain local needs.
That is why the Greek government wants to bolster its now junk-rated banks (in addition to the money that banks are getting directly from bailout-for-austerity loans) and foreign ones, at the cost of hurting the population. But since the economy (even at its healthiest level ever) can’t sustain its bailout borrowing costs (as opposed to its operating costs which would have been payable without the increased rates and bailout principle mixed in), this is an unstoppable downward spiral.
Greece’s GDP has contracted 13% (by 7% in the last quarter of 2011) from a late 2008 record high. (By comparison, the United Kingdom’s GDP has fallen by 20% in the same period, and though its unemployment rate has risen, its borrowing costs remain manageably low, making it cheaper to sustain its banks.) Greece’s savings rate at 7.5% is at three decade lows (but still higher than that of the US).
Meanwhile, Greece’s debt to GDP ratio is 160%. (It hovered around 100% from 1994 through 2008.) The unemployment rate at 20.9%, and the youth unemployment rate at 48%, has doubled since January 2008. There is nothing to indicate it won’t keep rising.
Money continues fleeing Greek banks, bonds, and stocks, as citizens try to preserve what they can, and foreign speculators play a game of chicken with bailout providers. The Greek stock market stands at just one-fifth of its January 2008 level. Ten year government bond yields are at 33%, compared to 5% just two years ago.
The speed and intensity of Greece’s decline reflects nothing short of an international mafia-style hit.
The majority of Greek workers didn’t break the government’s back, even if a very small subset strained it. Further, the more bailout measures forced on Greece, the more its economy will be ravaged to repay them. After four rounds of austerity, nationwide protests, $110 billion Euros in IMF and ECB bailouts, escalating interest rates driving borrowing costs higher and choking credit, a downgrade to junk, a Prime Minister replacement, and now another big bailout, Greece’s tragedy is just beginning.
Yet lessons from the Great Depression exist. By floating the Drachma (the equivalent of leaving the Euro), negotiating individually with creditors (telling banks to back off), and increasing internal public focus (the opposite of what's going on now) Greece was able to stabilize more quickly than larger European countries. It’s not entirely too late to try again: but it requires the currently unimaginable: a political will that is population – rather than bank – oriented.
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It turned out that my pre-determination proved accurate. I wonder if the members of Congress felt the same sense of same déjà vu that I did, as they were bopping up and down and applauding.
Obama's speech was a compilation of highlights from his past ones. One part optimism, two parts repetition equals one total uninspiring. Maybe it’s so boring, because it matters so little at this point. Taking away popularity polls, our national threshold for belief in hope or change has been trampled, not just because of Obama or Romney, but of the whole political apparatus that thrives on deflection of reality and posturing. We don’t have the same energy to expend listening to politicians, the endless spin that renders fact obsolete, responsibility absent, and true accomplishment, unnecessary.
We saw Optimistic Obama in his first address to Congress in 2009: “While our economy may be weakened and our confidence shaken; though we are living through difficult and uncertain times, tonight I want every American to know this: We will rebuild, we will recover, and the United States of America will emerge stronger than before.”
We got Presumptuous Obama in 2010: “As we stabilized the financial system, we also took steps to get our economy growing again, save as many jobs as possible, and help Americans who had become unemployed.”
We watched Philosophical Obama in 2011: “We are the first nation to be founded for the sake of an idea -– the idea that each of us deserves the chance to shape our own destiny. That’s why centuries of pioneers and immigrants have risked everything to come here… The future is ours to win.”
Now, we had Campaigning on Fairness Obama. He returned to the roots of his pre-Presidential words, having accomplished little to attain the goal that his words implied. Here are ten things that President Obama skirted:
1) The cost of healthcare insurance. Obama tried to play both sides, slapping a populist spin on an insurance industry gift. “That’s why our health care law relies on a reformed private market, not a Government program.” He claimed he won’t “go back” on things like health insurance companies being able to cancel policies. He didn’t say that insurance premiums have already risen 22% in the past two years. Republicans hate Obama’s ‘signature’ healthcare reform bill because it unconstitutionally forces people to purchase insurance. Democrats support the bill because Obama passed it. The reality is – by the time it takes effect in 2014, premium costs may have doubled. Frame it however you want, that means health insurance could cost twice as much when this bill takes effect as it did before it was passed. Meanwhile, there are more people without insurance (because they can’t afford it) even though insurance companies can’t cancel policies or deny insurance for pre-existing conditions. This bill merely offers insurance companies a wider pool of customers, with a few restrictions on how much they can pillage them.
2) Student Loan Defaults. Obama claimed he wants to cap interest rates on student loans - which would be great, but can only work in this particularly low rate environment. He urged colleges to keep costs down – again, something that’s worked out really well when he’s mentioned it before. This year, student loan debt surpassed credit card debt, breaching the $1 trillion mark, at an average of more than $25,000 per student (and up 47% over a decade ago, not all under Obama, but still a problem). Not surprisingly, student loan defaults rates have risen alongside this debt increase. Nearly 9% of loans defaulted in 2010, of those that began repayment in 2009, vs. 7% that began in 2008.) Obama didn’t mention this growing concern.
3) Youth unemployment. Obama took credit for the creation of 3 million jobs (I’m not going to debate that here). Regardless, youth unemployment is at its highest rate since 1948. The unemployment rate for those under age 25 is 18.1%, (31% for blacks) having risen sharply since 2008. Do the math. High student loan debt + diminishing job prospects = bad ending. Work-study programs have to be intense to really alter that.
4) Big banks. The largest firms continue to grow their asset bases and fee extrapolation strategies from their captive customer base (If you’re say, a JPM Chase customer, it costs you $5 to extract your own money from a Bank of America ATM – both banks get a cut). It was Obama that re-confirmed Fed Chairman Ben Bernanke for another fourteen years (and yes, a bi-partisan Congress agreed), and who still keeps Treasury Secretary, Tim Geithner around. Both men were gung-ho about the merger mania that dotted Wall Street in the fall of 2008 and making the ‘too-big-to-fail” banks bigger, as they now are.
5) Small banks. President Obama didn’t address the smaller bank closings occurring because the big banks got disproportionate subsides;, 389 smaller banks (with $297 billion in assets) failed from 2009 to 2011. Like during the early years of the Great Depression, this means less choice for individuals, less loans for local businesses, and consolidation of influence and market share for the big banks – which comprise Obama’s largest bundling base.
6) Borrowers. Despite a few tepid programs to help homeowners, the sheer number of foreclosures is higher today than it was in 2008. There were a record number of foreclosure filings: 2.9 million in 2010 and 2.7 million in 2011. These are predicted to rise in 2012 amidst default surges and more lender notices than in 2011.
Why? Because Obama’s program (that was supposed to help 5 million borrowers, and helped half a million) had to be approved by the banks. Banks don’t like citizen aid programs, even if they screwed citizens to begin with by fueling a $14 trillion toxic asset pyramid repackaging risky (for people), high interest-bearing (for them). Obama said, “The banks will repay a deficit of trust”? What?! When?! Where?!
7) Recent regulator incompetence. Regulators looked the other way, Obama said, pre-crisis. But he mentioned nothing about regulators' more recent passes; the SEC bestows banks settlements for fraudulent mortgage asset products, without extracting any admission of wrongdoing. He missed saying anything about the lack of related DOJ criminal indictments. The top five banks agreed to pay $1.149 billion to the SEC to settle subprime-mortgage related fraud charges, with no admission of guilt or criminal indictments. (The SEC settlement of $285 million with Citigroup was rejected by Judge Rakoff in November, 2011 and is being re-negotiated.) And Obama wants to create a Financial Crimes Unit? What’s the SEC supposed to be doing? or the DOJ? or the FBI?
8) MF Global and customer money. On the same topic – the deficit of trust thing: Obama avoided any talk about his buddy, Jon Corzine or MF Global, the nation’s eight largest bankruptcy. He didn’t point out how diabolical it was to use and ‘lose’ customer funds that were supposed to have been kept separate from bad bets. He didn’t suggest having a solid separation between customer money and financial firm money - as in - don't have it at the same firm. He claimed, "we will not bail you out again” and yet, we still are.
9) Banks hoarding. Obama neglected to mention the $1.6 trillion that banks are stashing at the Fed in the form of excess (and interest-bearing) reserves, which do nothing for the Main Street economy. Meanwhile, small business loans are at a 12-year low, having shrunk continuously since 2008.
10) Obama conveyed that we dodged a bullet by getting the banking system under control. He didn’t note the rising risk in the banking system: the largest four US banks (JPM Chase, Citibank, Bank of America and Goldman Sachs) control nearly 95% of the US derivatives market, which has grown by 20% since just last year, to $235 trillion. JPM Chase holds 11% of the world’s derivative exposure, Citibank, Bank of America, and Goldman comprise about 7% each. Goldman has 537 times as many (from 440 times last year) derivatives as assets and it’s still considered a bank holding company (as per Bernanke) that gets federal backing.
In all, the President's speech was reminiscent of George Clooney’s in Ides of March. We’ve heard it all before, maybe with slightly different words: America lost 4 million jobs before I got here, and another 4 million before our policies went into effect, but in the last 12 months, we added 3 million job. We must reduce tax loopholes, and provide tax incentives to businesses that hire in America. We must reform taxes for the wealthy (though he signed an extension of Bush’s tax cuts.) We must train people for an apparent abundance of expert jobs. We need more clean energy initiatives. We created regulations (big sigh of relief he didn’t use the word ‘sweeping’) to stop fraudulent financial practices. We will help homeowners. Wall Street must make up a "trust deficit.” Like Jamie Dimon cares.
In other words, Obama gave Wall Street a pass, while waxing populist. Don’t get me wrong. I expected nothing different. I will continue to expect nothing different, when he gets a second term, given the lame duo the GOP favors his key contenders to be.
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Nowadays, when any sovereign (including the US) gets downgraded by a rating agency, it's not just because its debt repayment ability is questionable (the publicized logic of rating agencies), but because it incurred more expensive debt to float its banking system. It chose to subsidize banks over people.
The S&P likes moving on Friday nights. It was on a Friday night that it downgraded US debt to AA+ from AAA. On Friday night, January 13, 2012, it downgraded France and Austria from AAA to AA+, and 7 other European countries, too; Cyprus, Italy, Portugal, and Spain by two notches; Malta, Slovakia, and Slovenia, by one notch. Portugal, Cyprus, Ireland and Greece are at junk status. Germany’s AAA rating is intact.
Nowhere in S&P’s statement about “global economic and financial crisis”, did it clarify that sovereigns were hit due to backing their largest national banks (and international, US ones) which engaged in half a decade of leveraged speculation. But here’s how it worked:
1) Big banks funneled speculative capital, and their own, into local areas, using real estate and other collateral as fodder for securitized deals with derivative touches. 2) They lost money on these bets, and on the borrowing incurred to leverage them. 3) The losses ate their capital. 4) The capital markets soured against them in mutual bank distrust so they couldn’t raise more money to cover their bets as before. 5) So, their borrowing costs rose which made it more difficult for them to back their bets or purchase their own government’s debt. 6) This decreased demand for government debt, which drove up the cost of that debt, which transformed into additional country expenses. 7) Countries had to turn to bailouts to keep banks happy and plush with enough capital. 8) In return for bailouts and cheap lending, governments sacrificed citizens. 9) As citizens lost jobs and countries lost assets to subsidize the international speculation wave, their economies weakened further. 10) S&P (and every political leader) downplayed this chain of events.
The United States
On Aug. 5, 2011, S&P downgraded US government debt to 'AA+'. This was four days after Congress voted to raise the US debt cap - to prevent a downgrade - proceeded by political squabbling and the US Treasury and Fed begging Congress to raise the debt cap. S&P, beacon of stamp-any-toxic-asset-AAA, accountability, claimed, “American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.” In other words, too much debt, too little income.
According to the US Treasury, the main reason for the debt increase was a stalling economy – lack of enough incoming tax receipts to pay US expenses, (which include interest payments on growing debt.) That’s not true. Tax receipts dropped $400 billion to $2.1 trillion in 2009 vs. 2008. Expenditures jumped to $3.5 trillion in 2009 from $3 trillion in 2008. Treasury debt ballooned by nearly $4 trillion from 2008 through 2010.
Where’s the money? About $1.6 trillion lies on the Fed’s books as excess reserves which banks - dealers for sovereign debt - put there. Nearly a trillion dollars went to backing Fannie Mae, Freddie Mac - which enabled banks to artificially overvalue related securities, and extra interest payments. There was $700 billion in TARP, which though mostly repaid, never manifested into debt reduction, and hundreds of billions of dollars of asset guarantees underlying big bank mergers. So, 75% of the extra debt went to saving banks. S&P didn’t mention this. The policy repeated across the Atlantic.
Ireland
The Irish government’s pain started when it guaranteed the bonds of Anglo-Irish bank in September 2008. By May, 2010, Central Bank head, Patrick Honohan, assured the world that he’d have ‘two big banks, fixed by the end of the year.’ Upon that endorsement, the government backed bondholders on the banks’ behalf. The economy deteriorated.
Six months later, nobody would lend to Irish banks. Irish austerity promises didn’t change the fact that Irish banks weren’t big enough to contain their waste. By November, 2010, banks paid for $60 billion Euro of maturing bonds with emergency ECB loans, and the ECB became the backbone for the Irish bank guarantee scheme, whose participants included Ireland’s big financial firms: Irish Life & Permanent p.l.c., Bank of Ireland, Allied Irish Bank p.l.c., Anglo Irish Bank Corporation Limited, and Irish Nationwide Building Society. Irish Government Debt doubled from 65.3 billion Euro to 118 billion Euro since 2009.
The ECB deemed the bailout a success. Yet, by the summer of 2011, Ireland was downgraded to a notch above junk and households (and foreigners) accelerated extracting money from Irish banks, weakening the banks’ funding base further. The Irish government now owes 110 billion Euros to the banks, the National Asset Management Agency (NAMA, aka “bad bank”) the EU, ECB and IMF, with no way to repay it.
Spain
According to a recent Business Week article, Spanish banks hold 30 billion Euros ($41 billion) of “unsellable” real estate loans. Just like in the US where smaller banks got hit hardest, small and mid-sized Spanish banks did too. In addition, about 308 billion Euros worth of Spanish loans are ‘troubled.’ Home prices in Spain are off 28% from their April, 2007 peak, with land values in the outskirts of urban areas, down by as much as 75%.
In economic desperation, the public elected conservative party leader, Mariano Rajoy, as Prime Minister in the end of 2011 who promised to lead Spain to economic recovery, by invoking austerity measures in return for backing to help the biggest Spanish banks.
Meanwhile, the top six Spanish banks sit on $33 billion of foreclosed assets having set aside 105 billion Euros in write-downs against bad loans since 2008, with another 60 billion Euros to come. The backdrop is a 23% unemployment rate, triple its 7.9% May, 2009 level. Property transactions continue to decline. Foreclosures keep ramping up. The gap between what banks want to sell foreclosed or troubled property at, and what investors are wiling to pay continues to widen, forcing more small and mid-size banks to buckle under larger than anticipated losses, which in turn squeezes liquidity out of local usage.
Greece
According to an SEC report from the National Bank of Greece (NBR) for the year ending 2010 – loans to businesses and households were expected to “remain under considerable pressure…[due to] “downward pressure on household disposable incomes and firms’ profitability from the austerity measures… are likely to impair further demand for loans.” They weren’t kidding. In order for the NCB (or any bank) to reduce its dependency on ECB funding, it has to reduce loans to its own economy.
The ECB agreed to accept worse collateral (with junk ratings), including bank issued bonds with Greek government guarantees (under a May, 2010 rule change for all member countries). The ECB bought Greek (and other) government bonds in the secondary markets, to support their value and thus, their value as loan collateral. As with the Fed’s QE measures, Euro-style – this only perpetuates a fantasy of demand.
After four rounds of austerity measures, nationwide protests, 110 billion Euros in IMF and ECB bailouts to keep bondholders (and banks) happy, escalating interest rates driving borrowing costs higher, a downgrade to junk, and a Prime Minister swap; Greece remains in tatters with more pain to come.
Italy and Portugal
Last summer, S&P warned it would downgrade Portugal if it didn’t play ball with the IMF and EU over a 78 billion Euro bailout. So Portugal towed the austerity line. Its economy deteriorated. S&P downgraded it to junk status.
The IMF and EU declared that Italy too, needed ‘structural reform’, meaning public austerity and privatization. National assets went up for fire-sale, as they did in Spain and Portugal, to the highest international bidder. Now, the high borrowing costs the government faces as a result of bolstering the banking system, paying bondholders and selling infrastructure, has resulted in more downgrades and dim prospects.
According to the Italian Central Bank, 500 Italian cities are facing losses on derivatives contracts. JPM Chase and Banco IMI are accepting Italian government bonds as collateral, rather than less risky US Treasuries or cash, certain that the ECB will step in to buy, and thus prop up, Italian bonds if needed, as they did in August, 2011.
As Greece showed, using high-cost sovereign debt as collateral leads to more bailouts to ensure big lenders get their money back. JPM Chase, having weathered the US subprime crisis with support from the US Fed, isn’t about to lose on that bet. Meanwhile, several Italian towns, the City of Milan and the Tuscan region, are suing the big American, German, Swiss and French banks over derivative losses and misleading asset purchases, who will likely get bailout money anyway.
Bailout Economics Doesn’t Work
ECB bailout money didn’t (and won’t) go towards helping any European country’s local economy, any more than it went to aiding the mainstream US economy. The ECB and IMF, at the Fed, US Treasury and US administration’s urging, camouflaged the insolvency of European banks, perpetuating losses with bailouts, and forcing cowardly governments to support them, while turning a blind eye to boosting core economies.
Meanwhile, banks with access to the ECB’s ‘window’ are taking the money and immediately putting it back into the ECB as reserves. Overnight deposits at the ECB continue to break records, currently hovering around 500 billion Euro ($640 billion). As in the US, European banks aren’t using that liquidity to help fix local economies, but hoarding it to preserve themselves. The amount on reserve is 98% of the total made available in emergency 3-year loans in late December at 1% interest; banks get 0.25%, which means they are paying 0.75% interest for the loans, far less than the market would charge them.
The die has been cast. Central entities like the Fed, ECB, and IMF perpetuate strategies that further undermine economies, through emergency loan facilities and bailouts, with rating agency downgrades spurring them on. Governments attempt to raise money at harsher terms PLUS repay the bailouts that caused those terms to be higher. Banks hoard cheap money which doesn’t help populations, exacerbating the damaging economic effects. Unfortunately, this won't end any time soon.
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Nonfiction
1) Why America Failed: The Roots of Imperial Decline by Morris Berman
An intensely thought-provoking read. Berman pulls no punches in laying bare the truths behind America’s hustling culture, and how destructive that mentality has been for the country since its inception. The book is a post-mortem of a societal notion that at its core, relies upon crushing the weak to become stronger.
2) Vultures Picnic: In Pursuit of Petroleum Pigs, Power Pirates, and High-Finance Carnivores by Greg Palast
Palast strikes again – lazer-beaming on the corporate kings that literally feed upon the carcasses of the human population – whether in financial terms by ripping off small towns, pension funds and mortgage holders, or through the slaughtering of forests, sea-life, animals, and village children. Vultures’ Picnic is an eye-opening, heart-pumping, mind-blowing experience that should not, MUST not, be missed.
3) With Liberty and Justice for Some: How the Law Is Used to Destroy Equality and Protect the Powerful by Glenn Greenwald
Before Jon Corzine dodged Congressional questions about MF Global’s stealing $1.2 billion in customer funds with impunity, there was Glenn Greenwald. In this book, he walks us through Watergate, the Iran-Contra scandal, and Obama's shielding of Bush-era officials, revealing how the media, both political parties, and the courts conspire to foster a system that effectively exalts torture, war crimes, domestic spying, and financial fraud committed by the elite at the expense of everyone else.
4) Tropic of Chaos: Climate Change and the New Geography of Violence by Christian Parenti
Parenti’s epic new book describes the harrowing condition of catastrophic convergence, or the “collision of political, economic and environmental disasters.” It is a wake-up call to humanity, particularly to the richest nations (with the U.S. at the top of that list). The detrimental effects of our environmental gluttony at the heart of our economic avarice are not blurry fatalistic hypotheses—they are here, today. Parenti breaks them down.
5) Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy by Yalman Onaran with a forward by Shelia Bair
With Bank of America trading below $5 and the world’s biggest banks merely appearing solvent due to enormous government subsidies, Zombie Banks is crucial reading. In extremely accessible prose, Onaran shows how ongoing government backing of risk-laden banks will only prolong global economic crises.
6) Getting Steamed to Overcome Corporatism: Build it Together and Win by Ralph Nader
This book is Vintage corporate-raider Nader, and it reads like a horror story, delineating a terrifying cornucopia of corporate crimes that not only continue unabated, but constantly pummel us financially, socially, physically, and mentally. Nader's commentary on this astonishing array of corporate transgressions (during just one year) is imbued with the passion and experience of decades as a crusader for justice.
7) Throw Them All Out by Peter Schweizer
Schweizer spares neither political party in his exhaustive research on how politicians use their knowledge, position, and influence to make money – for themselves. This book will disgust you – because it reveals the extent to which the people that make the laws in this country, don’t abide by them when it comes to personal wealth accumulation.
8) The 99%: How the Occupy Wall Street Movement is Changing America by Alternet Editors
There remains no meaningful federal opposition to the systemic destruction of Main Street's economy by the titans of Big Finance. The Occupy movement, physically and conceptually, could be that opposition. This book gathers in-depth information abut this struggle from Naomi Klein, Amy Goodman, James Galbratih, Robert Johnson Yves Smith, myself and many others.
Fiction
9) The Sense of an Ending by Julian Barnes
I have been a Julian Barnes fan since reading one of his earlier novels, Talking it Over. No one gets the human condition better than Barnes. This book follows the story of a man facing his old age, trying to make sense of his past – but it’s so much more. I finished it in one plane ride. You won’t want to put it down.
10) The Devil Himself: A Novel by Eric Dezenhall
This fall, I had the pleasure of sharing an NPR radio show segment with Eric Dezenhall and had no idea beforehand, that he was a novelist. I’m glad that I know this now. The Devil Himself is fast-paced, intricately woven historical fiction, focusing on World War II in America and a colorful set of ‘gangstas’ fighting Nazis.
11) IQ84 by Haruki Murakami
I just started reading this book (global economic crises taking up so much mental space and all) and am completely hooked. More ethereal and darker than Murakami’s other novels, it follows the story of a young woman encountering an alternate reality, and an aspiring writer at the precipice of a life shaken to its core.
For the kids:
12) Turbie the Turtle Duck by Rich Arons
Political Cartoonist Rich Arons focuses his immense talent in the direction of children’s books. Turbie the Turtle-Duck is reminiscent of the best of Dr. Seuss from Turbie, the turtle-duck himself, to all the wonderful inhabitants of the Lost Isle of Animoxie, like the Pea-cocker spaniels at High-Biscuit Forest and elephant mice at Cheesy-Tree Park. The best review – my three-year- old niece wants me to get her a turtle-duck NOW.
13) The Rise of the Seven Stones (The Gem Series) by Jamie Austin
This book, the first in a series, came out last year, but in kindle form, this year. Debut author, Jamie Austin weaves an enchanging story that is JK Rowling’esque. it begins in Manhattan where twelve-year-old Lillian is struggling to make sense of her parent's impending divorce. She and her younger brother James are sent away to their eccentric grandmother. On their first night in her home, they are transported to a bizarre universe., shrunken down to the size of a mite, and lost inside the world of their grandmother's magical brooch. It’s terrific.
]]>On the one-year anniversary of his accident, his chief-of-staff, Bradley I. Abelow declared, “Corzine has returned to his former self as a thorough and exacting boss.” (Italics mine.)
Fast forward to the current MF Global flameout. Abelow shifted to Corzine’s Chief Operating Officer. And not only did Corzine ratchet up the ante on ways to really piss off farmers, but after several days of engaging in verbal dodge ball with Congress, this ‘thorough and exacting boss’ maintained his Forest Gump type cloak of secrecy regarding the stolen $1.2 billion of his customers’ segregated money.
After days of political-reality TV, we knew nothing more about its evaporation. Corzine and his stewards, Abelow and Chief Financial Officer, Henri Steenkamp, executed a perfect chorus of ‘I don’t recalls’, ‘I didn’t intends’ and ‘the butler did its’.
For the most part, testimony from the various regulators didn’t shed additional light on the ‘missing’ funds either (everyone’s extremely sorry and deep in search mode) but they did reveal extreme, pass-the-blame incompetence, in the spirit of AIG.
Acronym alert. SEC director, Robert Cook testified that MF Global Holding Company (like AIG) had no official consolidated supervisor regulating it; one of its subsidiaries, MF Global UK Limited, fell under the UK Financial Services Authority (FSA.) The other one, MF Global Inc. (MFGI) was registered under the Commodity Futures Trade Commission (CFTC) as a FCM (futures commission merchant) and also, under the SEC as a broker-dealer. It was the Chicago Board of Options Exchange (CBOE) supposedly overseeing MFGI’s broker-dealer activities, while its futures activities fell under the CFTC, National Futures Association and the Chicago Mercantile Exchange (CME). Somewhere in the mix lurked the private self-regulatory body, the Financial Industry Regulatory Authority (FINRA). Really, how many inept regulatory bodies does it take to screw customers out of $1.2 billion?
But, here’s how we know Corzine was lying – besides the nervous body movements.
During the summer of 2011, the CBOE and FINRA told MF Global Inc. that it didn’t have enough capital behind its repo-to-maturity (RTM) positions in European sovereign bonds – the positions Corzine put on. By mid-August, the SEC got involved and met with Corzine and other MF Globalites. They then had to file a net capital deficiency notice on August 25th for $150 million.
During the week of October, 17th – MF Global Holding had to increase capital again at MFGI - for the same positions. The next week, on October 25th, it released abysmal quarterly earnings, and got downgraded to almost junk status. The stock plummeted and customers were heading for the hills, the fastest ones getting their money out, others getting locked out. The SEC set up camp at MF Global headquarters in Manhattan on October 27th to “monitor the situation” and “engage with senior management regarding the steps that were being taken by the firm” regarding possibilities like selling the firm, selling the customer business, or selling the RTM positions.
On Sunday afternoon, October 30, a perspective buyer for MFGI’s customer business emerged: Interactive Brokers (whose judgment I question, so watch out for them). In the wee hours of Monday morning, October 31, – the ‘missing’ funds were detected. Interactive Brokers balked. Bankruptcy proceedings begun at 9 AM.
The CME’s testimony stated that just past mid-night on October 31,st Christine Serwinski, the chief financial officer of MF Global's North American division, and Edith O’Brien, a treasurer, told Mike Procajlo, an exchange auditor that about $700 million in customer money was transferred on October 27th, 28th and possibly October 26 from the broker-dealer side of the business to ‘meeting liquidity issues.’ The CME hadn’t noticed this while reviewing the firm’s books prior to bankruptcy. Another $175 million was used by MF Global UK.
The CFTC disclosed that MF Global’s general counsel, Laurie Ferber notified them Monday evening, October 31st about “a significant shortfall in its segregated funds account”. Neither the SEC, nor the CME had picked up on this beforehand.
As a broker-dealer registered with the SEC, MFGI was not just subject to CFTC rules, but also to the SEC's customer protection rule that prohibits use of customer funds or securities to support proprietary trading or expenses. It also prohibits customer funds or assets from being pledged as collateral for the firm’s own trades or to raise funds, plus requires a reserve account be maintained that is bigger than their holdings – just in case.
The CFTC has a more lax rule, called Reg 1.25, weakened courtesy of MF Global, JPM Chase, and others that enables segregated customer funds to be used for investing in foreign sovereign bonds (investing – not posting as margin or acting as collateral). But as Janet Tavakoli pointed out in her excellent MF Global analysis; the ‘missing’ customer funds were not in the currency of the foreign sovereign bonds, as per the rule’s stipulation. Plus, none of the required replacement assets were held against those funds. Indeed, there is no element of Reg 1.25, the reg cited as a potential legal loophole by various media, that allows segregated customer funds to be used for risky purposes – like saving a firm from destruction long enough to sell it. Translation – the ‘missing’ funds were stolen against rules, from their rightful segregated customer accounts. Corzine claimed no knowledge of this.
But the reality is - the clock ran out on Corzine’s big bet and customer funds were the only way to keep it ticking until a potential sale of the firm could be confirmed. If the funds hadn’t been switched, the firms seeking margins would have taken losses. The motive was to optically alter the appearance of MF Global and exit, leaving the bag with someone else. You can’t have that clear a motive and no idea of how to achieve it. It’s implausible.
Let me put $1.2 billion into a perspective that the House committees didn’t. According to its second quarter SEC filing, MF Global had $3.7 billion of available liquidity. The funds were equivalent to a third of that liquidity. That’s not a tiny figure. If you’re running a firm buckling under the weight of the bets you’re losing, you’re damn well aware of your liquidity lines – they are your life raft.
Besides that, MF Global’s net revenue for the second quarter was $206 million and for the six months ending September 30, 2011, it was $520 million. The ‘missing’ customer money was more than twice the firm’s net for the first half of their year.
To recap. Corzine was obsessed with the European sovereign bet. So, he fired his risk officer, Michael Roseman for questioning it, and replaced him with a yes-man, Michael Stockman whose job description appeared to have included stroking Corzine's – er – ego, and to remain quiet about any trade concerns. He rides the trade through a succession of flailing earnings and intense market volatility, while meeting with regulators questioning its sustainability. He knows he’s got to pony up a chunk of capital in the summer to appease them and stick with it. And when finally, MF Global’s ratings were downgraded on October 25th, a bunch of calls transpire between him and NY Fed head and former Goldmanite, William Dudley before the firm goes bankrupt a week later, with nearly $1.2 billion in customer money ‘missing.’
We’re supposed to believe this ‘thorough and exacting’ man knew nothing about where it went? Or that his sense of entitlement and bravado was so big, he didn’t think it was wrong to take that money? Or that he wasn’t aware it was available? At all?
No. Not possible. And yet, over half a dozen regulatory bodies were oblivious to the fund heist. Finding Corzine guilty of a crime would be like asking them to indict themselves. The CFTC Enforcement division can refer criminal matters to the Department of Justice for prosecution. But the DOJ has punted on every Wall Street crime related to the 2008 subprime crisis. So what will probably happen – is that Corzine may get a little fine from the Washington regulators. Legislators will move on to figuring out how to incorporate MF Global into stump speeches. Those that had their money stolen will battle it out in civil suits for years. And again, no lessons will be learned. No practices altered. No heads will roll.
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The Fed is merely continuing its unfettered brand of bailout-economics, promoted with heightened intensity recently by President Obama and Treasury Secretary, Tim Geithner in the wake of Germany not playing bailout-ball. Recall, a couple years ago, it was a uniquely American brand of BIG bailouts that the Fed adopted in creating $7.7 trillion of bank subsidies that ran the gamut from back-door AIG bailouts (some of which went to US / some to European banks that deal with those same US banks), to the purchasing of mortgage-backed–securities, to near zero-rate loans (for banks).
Similarly, today’s move was also about protecting US banks from losses – self inflicted by dangerous derivatives-chain trades, again with each other, and with European banks.
Before getting into the timing of the Fed’s god-father actions, let’s discuss its two kinds of swaps (jargon alert - a swap is a trade between two parties for some time period – you swap me a sweater for a hat because I’m cold, when I’m warmer, we’ll swap back). The Fed had both of these kinds of swaps set up and ready-to-go in the form of : dollar liquidity swap lines and foreign currency liquidity swap lines. Both are administered through Wall Street's staunchest ally, and Tim Geithner's old stomping ground, the New York Fed.
The dollar swap lines give foreign central banks the ability to borrow dollars against their currency, use them for whatever they want - like to shore up bets made by European banks that went wrong, and at a later date, return them. A ‘temporary dollar liquidity swap arrangement” with 14 foreign central banks was available between December 12, 2007 (several months before Bear Stearn’s collapse and 9 months before the Lehman Brothers’ bankruptcy that scared Goldman Sachs and Morgan Stanley into getting the Fed’s instant permission to become bank holding companies, and thus gain access to any Feds subsidies.)
Those dollar-swap lines ended on February 1, 2010. BUT – three months later, they were back on, but this time the FOMC re-authorized dollar liquidity swap lines with only 5 central banks through January 2011. BUT – on December 21, 2010 – the FOMC extended the lines through August 1, 2011. THEN– on June 29th, 2011, these lines were extended through August 1, 2012. AND NOW – though already available, they were announced with save-the-day fanfare as if they were just considered.
Then, there are the sneakily-dubbed “foreign currency liquidity swap” lines, which, as per the Fed's own words, provide "foreign currency-denominated liquidity to US banks.” (Italics mine.) In other words, let US banks play with foreign bonds.
These were originally used with 4 foreign banks on April, 2009 and expired on February 1, 2010. Until they were resurrected today, November 30, 2011, with foreign currency swap arrangements between the Fed, Bank of Canada, Bank of England, Bank of Japan. Swiss National Bank and the European Central Bank.
They are to remain in place until February 1, 2013, longer than the original time period for which they were available during phase one of the global bank-led meltdown, the US phase. (For those following my work, we are in phase two of four, the European phase.)
That’s a lot of jargon, but keep these two things in mind: 1) these lines, by the Fed’s own words, are to provide help to US banks. and 2) they are open ended.
There are other reasons that have been thrown up as to why the Fed acted now – like, a European bank was about to fail. But, that rumor was around in the summer and nothing happened. Also, dozens of European banks have been downgraded, and several failed stress tests. Nothing. The Fed didn’t step in when it was just Greece –or Ireland - or when there were rampant ‘contagion’ fears, and Italian bonds started trading above 7%, rising unabated despite the trick of former Goldman Sachs International advisor Mario Monti replacing former Prime Minister, Silvio Berlusconi’s with his promises of fiscally conservative actions (read: austerity measures) to come.
Perhaps at that point, Goldman thought they had it all under control, but Germany's bailout-resistence was still a thorn, which is why its bonds got hammered in the last auction, proving that big Finance will get what it wants, no matter how dirty it needs to play. Nothing from the Fed, except a small increase in funding to the IMF.
Rating agency, Moody’s announced it was looking at possibly downgrading 87 European banks. Still the Fed waited with open lines. And then, S&P downgraded the US banks again, including Goldman ,making their own financing costs more expensive and the funding of their seismic derivatives positions more tenuous. The Fed found the right moment. Bingo.
Now, consider this: the top four US banks (JPM Chase, Citibank, Bank of America and Goldman Sachs) control nearly 95% of the US derivatives market, which has grown by 20% since last year to $235 trillion. That figure is a third of all global derivatives of $707 trillion (up from $601 trillion in December, 2010 and $583 trillion mid-year 2010. )
Breaking that down: JPM Chase holds 11% of the world’s derivative exposure, Citibank, Bank of America, and Goldman comprise about 7% each. But, Goldman has something the others don’t – a lot fewer assets beneath its derivatives stockpile. It has 537 times as many (from 440 times last year) derivatives as assets. Think of a 537 story skyscraper on a one story see-saw. Goldman has $88 billon in assets, and $48 trillion in notional derivatives exposure. This is by FAR the highest ratio of derivatives to assets of any so-called bank backed by a government. The next highest ratio belongs to Citibank with $1.2 trillion in assets and $56 trillion in derivative exposure, or 46 to 1. JPM Chase's ratio is 44 to 1. Bank of America’s ratio is 36 to 1.
Separately Goldman happened to have lost a lot of money in Foreign Exchange derivative positions last quarter. (See Table 7.) Goldman’s loss was about equal to the total gains of the other banks, indicative of some very contrarian trade going on. In addition, Goldman has the most credit risk with respect to the capital it holds, by a factor of 3 or 4 to 1 relative to the other big banks. So did the Fed's timing have something to do with its star bank? We don't really know for sure.
Sadly, until there’s another FED audit, or FOIA request, we’re not going to know which banks are the beneficiaries of the Fed’s most recent international largesse either, nor will we know what their specific exposures are to each other, or to various European banks, or which trades are going super-badly.
But we do know from the US bailouts in phase one of the global meltdown, that providing ‘liquidity' or ‘greasing the wheels of ‘ banks in times of ‘emergency’ does absolute nothing for the Main Street Economy. Not in the US. And not in Europe. It also doesn’t fix anything, it just funds bad trades with impunity.
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