MARRIED MEN UNDERSTAND CREDIT DEFAULT SWAPS

MARRIED MEN UNDERSTAND CREDIT DEFAULT SWAPS

There is an old saying that”if your wife catches you in bed with another woman the only thing to do is deny it”. So it is with the financial system in today’s world.

The parallel with Credit Defaults Swaps is remarkable and the US Government has already created the regulatory equivalent of the cheating husband to deal with such an eventuality. It is called the International Swaps and Derivatives Association (“ISDA”)

Created in 1985, it was run by a former J P Morgan Managing Director of some 25 years seniority, Mark Brickell who was President from 1988 to 1992. At the end of his tenure he became the chief lobbyist for the industry. His subsequent “successes”, if you can call it that today, included helping to defeat all US Congressional efforts to regulate derivatives in 1994 and again in 1998. It would be fair to say he served his masters well.

Having once displayed his credentials as a regulator who was allergic to regulation, President Bush nominated him to be chief regulator at Freddie Mac and Fannie Mae, the biggest and most bankrupt government sponsored real estate companies on the planet. How is that bail out working out by the way?

In 2005 the ISDA also allowed rule changes to CDO payouts that would benefit those who bet against (shorted) mortgage-backed securities. We all know how well that has worked out for Goldman Sachs J P Morgan and others.
ISDA also has a series of regional committees empowered to make official binding decisions as to what constitutes a “credit event” such as a default. Greece or Portugal etc defaulting on their scheduled debt payments being a simple illustration, although there are many complex variants to this theme.
What is extremely important however are the consequences of a credit event,  namely the triggering of what is effectively an insurance policy called a “credit default swap” (“CDS”), payable in full to the holders of the defaulted debt.
So who then are the issuers of the CDS who would have to pay up; well of course the too big to fail banks. Their plan rather like AIG in the sub prime crisis was to cash the insurance premiums, make huge profits and executive bonuses, on the assumption they would never be called upon to pay. When the sub prime fraud blew up in 2008, AIG was bailed out with tens of billions of dollars by the US taxpayer.
So how much could the losses be from triggering credit default swaps? In this shady unregulated world of shadow banking nobody really knows.
The Bank of International Settlements (“BIS”) produces bi-annual statistics which show outstanding credit default swaps of USD 32 TRILLION. To put this is perspective the entire equity of the top 5 US banks is barely USD 1 Trillion. It does not need a genius to work out that there may be a problem.
Incidentally the BIS total reported derivates, including interest rate swaps, exchange rate swaps and credit default swaps, is an utterly mind blowing figure of USD 700 Trillion, or over ten years global GDP. How strange the world’s financial elite failed to see this as a problem?
However, in reality, the central bankers, finance ministers, all the major banks and even Warren Buffet, who described these derivative products as “Weapons of mass financial destruction” are fully aware that this gigantic powder keg exists, waiting to be triggered by a “Credit Event”.
This is the real risk of Greece, and has nothing at all to do with the measly USD 200 Billion, of un-payable debt, which makes all the mindless mass media headlines. After all USD 200 Billion is barely two months of US budget deficit.    
It has everything to do with avoiding at all costs the detonation of the derivative products.
So when a Credit Event arises, IDSA the sole official and as explained above, “completely honorable and independent “ arbiter, will just like the married man caught in the act, simply deny it.

THE CFTC …..Or ….YOU’LL NEVER GUESS… GOLDMAN SACHS

THE CFTC …..Or ….YOU’LL NEVER GUESS… GOLDMAN SACHS

No review of financial Regulators would be complete without a few words on that “paragon of ethical virtue, transparency and professionalism”, the Commodities and Futures Trading Commission (“CFTC”). This organization is for commodities the equivalent of the SEC for stocks and shares.

The stated mission of the CFTC is “to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures”. Let’s see how well they do their job.

They are an “Independent Government Agency”, which means they are not directly under Presidential control. That sounds good, so whose control are the under? The present Chairman is Gary Gensler, who previously worked for “you’ll never guess …Goldman Sachs”. He also worked in the Clinton administration under Robert Rubin, treasury secretary who previously was joint chairman of “you’ll never guess …..Goldman Sachs”. He is part of the revolving door policy between Washington and Wall Street, practiced so effectively elsewhere. Why would a highly paid Goldmanite take a low paid Government job, well because he is very useful in that position. At the end of his tenure he will be the Financial Mafia equivalent of a “Made Man” with a very useful address book.

The CFTC is funded by the US Government and oversees multi-trillion dollar markets, and with over 600 staff and a budget approaching USD 200 Million, one would have thought they are well equipped for the task. However ……

Recently, MF Global, a major trading house, run by Jon Corzine, ex Champagne socialist Governor of New Jersey, and yet another former Joint Chairman of “you’ll never guess…..Goldman Sachs”, imploded, with losses exceeding USD 1 Billion, the sixth largest bankruptcy in US history. Incidentally Corzine almost succeeded in bankrupting New Jersey as well.

This caused Mr Gensler to refuse to handle the file due to his close personal relationships with Corzine. Did nobody notice this conflict when Gensler was being confirmed in the position, or perhaps that is why he got the job?

An amazing feature of bankruptcies is that sensational newspaper headlines always cover those who lost the money. They never go looking for the guys on the other side of the trade who MADE a billion. If you know in advance you will lose a billion it should be easy to find friends to help you out on the winning side of the trade. Oh forget it,  just a nasty thought, I ‘m sure it could never happen.

In another case of willful blindness the CFTC has failed to investigate the multi year 24/7 fraudulent manipulation of the gold and silver markets, perpetrated by notably JPMorgan Chase and HSBC. These banks have for years maintained massive short positions in both precious metals, and the shares of producing companies with a view to suppressing price. The CFTC has been inundated with literally thousands of letters of complaint and have heard from expert testimony, notably from Harvey Organ, the impact these short positions have on price.

They even heard directly from a “Whistle Blower”. Isn’t it curious how honest citizens are called whistleblowers, but crooks are not called crooks? Mr Andrew McGuire having advised when J P Morgan traders were going to attack the market and having recordings of their conversations when the raid was going on, actually was deliberately cut short during his detailed testimony of events to the CFTC.

If this sounds incredible both testimonies are available on You Tube.

So the CFTC, REGULATORS OR AIDING AND ABETTING FRAUDULENT MARKET MANIPULATION, you decide?

REGULATORS OR RESETTERS

REGULATORS OR RESETTERS

The general public is becoming increasingly aware of the extent of fraud and corruption which is endemic within the financial system. We could give the entire sector a Triple CCC rating namely Corrupt Crony Capitalism.

So how have they been able to get away with stealing for so long with so few people asking questions? It is because the whole system is rigged to have the appearance of regulatory governance and oversight. A fine example is the Securities and Exchange Commission (“SEC”).

Let us first look at how the SEC came into existence, (Source text in Italics Wikipedia).

 “Following the 1929 Wall Street Crash, the U.S. economy had gone into a depression, and a large number of banks failed. The Pecora Investigation sought to uncover the causes of the financial collapse. As chief counsel, Ferdinand Pecora personally examined many high-profile witnesses, who included some of the nation's most influential bankers and stockbrokers.

The Pecora Investigation uncovered a wide range of abusive practices on the part of banks and bank affiliates. These included a variety of conflicts of interest, such as the underwriting of unsound securities in order to pay off bad bank loans, as well as "pool operations" to support the price of bank stocks. Does any of this sound familiar?

The hearings galvanized broad public support for new banking and securities laws.

 As a result of the Pecora Commission's findings, the United States Congress enacted the Glass–Steagall Banking Act of 1933 to separate commercial and investment banking, the Securities Act of 1933 to set penalties for filing false information about stock offerings, and the Securities Exchange Act of 1934, which formed the SEC, to regulate the stock exchanges.  Pecora was appointed as one of the first commissioners of the SEC.

In 1939 Ferdinand Pecora published a memoir that recounted details of the investigations, Wall Street under Oath. Pecora wrote: "Bitterly hostile was Wall Street to the enactment of the regulatory legislation." As to disclosure rules, he stated that "Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker's stoutest allies."

History repeats itself every 75 years or so. These very laws, detrimental to banking interests but essential to protecting the general public, were either repealed or ignored by corrupt regulators, congress and executive branch.

To illustrate the point over the past few years the SEC has fined almost all of the top 10 Global Banks for serious offences.

The League Table of crooked banks, fined over USD 100 Million and their fraud specialty is shown below:

UBS                 USD 780 Million                 Offshore banking services tax fraud

Goldman           USD 550 Million                Civil Fraud; (SEC cut only USD 300 Million)

Citi                   USD 285 Million                Bubble Securities

J P Morgan        USD 154 Million                Mortgage securities

Wells Fargo       USD 148 Million                Misleading Investors

The reality is that those banks commit crimes and fraud unabated against their clients and third parties. We only know of the cases where they actually get caught with their hand in the till.

Complaints are lodged with the SEC as regulator who investigates and imposes fines against the banks without either the banks or their management being charged criminally for any wrongdoing.

 Thereafter the banks are charged what to the public seem a lot of money but to a Global bank are a few short weeks of profit in the overall scheme of things, ultimately paid for by the shareholder.

The true beneficiaries of all this are the SEC who pocket literally billions in fines on the back of the crimes committed, while the unfortunate investor loses in general many multiples of said amounts, while leaving their banking cronies in place  to do it all over again.

They should be in the Guinness Book of Records as the world’s most successful re-setter

PAGING MR DRAGHI

PAGING MR DRAGHI

Yesterday’s post THE TRILLION EURO MAN concerned   the most flagrant EUR market manipulation planned to date, which may have serious unforeseen and unintended consequences.

However Mr Draghi can hardly claim with his background that he does not know the consequences of his acts. He obtained a PhD in economics from the Massachusetts Institute of Technology in 1976 under the supervision of two Nobel Laureates Franco Modigliani and Robert Solow. Surely in his studies he read not only Keynesian economists, but also Ludwig Von Mises, Friedrich Hayek, a Nobel Prize winner in his own right, and Hayek’s student Murray Rothbard of the Mises Institute and Austrian school of economics. 

One of Murray Rothbard’s most important contributions to 20^th Century economics was his study of “America’s Great Depression:” widely recognized, even by Ben Bernanke, as the closest parallel to today’s situation.

Among the most significant conclusions of the study were:

“If government wishes to see a depression ended as quickly as possible, and the economy returned to normal prosperity, what course should it adopt? The first and clearest injunction is: don’t interfere with the market’s adjustment process. The more the government intervenes to delay the market’s adjustment, the longer and more grueling the depression will be, and the more difficult will be the road to complete recovery.”

Rothbard went on to write “The longer the inflationary boom continues the more painful and severe will be the necessary adjustment process… the boom cannot continue indefinitely, because eventually the public awakens to the governmental policy of permanent inflation, and flees from money into goods, making its purchases while the currency is worth more than it will be in future.”

“The result will be a ‘runaway’ or hyperinflation, so familiar to history, and particularly to the modern world. (Weimar Republic) Hyperinflation, on any count, is far worse than any depression: it destroys the currency – the lifeblood of the economy; it ruins and shatters the middle class and all ‘fixed income groups;’ it wreaks havoc unbounded… To avoid such a calamity, then, credit expansion must stop sometime, and this will bring a depression into being.”

Mr Draghi knows all this, the examples of the Weimar Republic and the Great Depression are taught to every economics student.

Why then is he deliberately and with premeditation, pursuing money creating highly inflationary policies, regardless of the known consequences, for the middle classes and people on fixed income such as retirees?

THE TRILLION EURO MAN

THE TRILLION EURO MAN

Those brought up on 1970’s American TV series, will all remember Lee Majors, the Six Million Dollar man. Now introducing “Super” Mario Draghi, the 21^st Century’s inflation adjusted Trillion Euro Man.

The ECB has recently provided a program of loans LTRO, to insolvent European Banks, which they can use to purchase European Sovereign Debt. This is of course “totally different” from the ECB buying Sovereign debt directly, which would not be allowed. Having successfully outmaneuvered Mrs. Merkel who is no doubt fuming in the Chancellery and pumped EUR 489 Billion into the banking system one has to wonder what Draghi will do for an encore?.

The EUR 489 Billion LTRO initial program was not enough to entice the banks to buy Sovereign Bonds as they preferred to keep the cash for themselves. The only solution is to up the ante and latest rumors from Credit Suisse is that the ECB is likely end February to do a further LTRO for a mind boggling EUR 1,000, Billion, increasing the ECB balance sheet from EUR 2, 100 Billion to EUR 3,800 Billon in about 6 months, this time even surpassing the annual GDP of mighty Germany.

This also towers above the achievements of Helicopter Ben Bernanke in money creation, with the Fed’s puny balance sheet of worthless debt, guaranteed by the US taxpayer, presently only a measly USD 2,400 Billion.

We are beginning to see Mr Draghi’s true colors, namely saying one thing and finding a convenient almost legal way to do virtually the opposite, without people noticing. He has a great future as a Central Banker, provided his wife does not start currency trading as a hobby.

When the objective of the Basel capital requirements, logically would lead to Bank deleveraging, Banks are now having unlimited funds stuffed in their hands and being encouraged to do expand their balance sheets.

This massive debt creation would of course further weaken the EUR currency. Some would say this cannot happen. Mr Hildebr…..er … sorry, Jordan at the SNB is ready to print all the CHF necessary to buy all the EUR the world does not want, and maintain the EUR/CHF Peg at 1.20. Good luck with that.

Equally sinister is that with immense pressure to buy Sovereign bonds, which self respecting insolvent bank is going to lend money to the private sector, which actually produces wealth and needs finance to do so, and incur the wrath of the ECB, their lender of last resort? In addition who could resist borrowing at 1% for 3 years and getting multiples of that as yield on “risk free” Sovereign debt?

Joking and SNB (synonymous) apart, this will be a game changer in the undeclared currency wars between the USD and the EUR. We could well see a response, coordinated or otherwise, from the FED, as a too strong USD in an election year is bad for jobs and re-election prospects of incumbent Presidents.

In Germany the weak EUR is very good for exports, to its bankrupt neighbors and elsewhere, but Mrs. Merkel has to decide soon if Germany can accept the Stealth QE which will ultimately consume the EUR or whether Germany should exit the Euro Zone. The German people at 65% have made it very clear they want this to stop, but who listens to popular opinion these days.

The person who will force the decision is Mario Draghi, the real leader of Europe today, who is relentlessly pursuing the Agenda of the international financial elites, who put him in his present job. They are completely indifferent to whether the consequences are reducing the German population, whose greatest crime since the end of World War II has been to work hard, and bail out their East German cousins, to multi-generational debt serfdom.

STALIN UNDERSTOOD RATING AGENCIES

STALIN UNDERSTOOD RATING AGENCIES

When Stalin said,” it is not important who votes, what is important is who counts the votes” he understood perfectly the role of rating agencies.

In today’s world, a handful of rating agencies have the monopoly on determining what is triple AAA and what is triple CCC. Once again the general public accepts unquestioningly these ratings as if they were the financial equivalent of The Ten Commandments. 

Politicians scurry away from the rating agencies findings like scalded chickens, finance ministers and central bankers engage in slanging matches like schoolchildren, saying it is not me but my neighbor who should be downgraded, Eurocrats and others say that the rating agencies should be barred from down grading countries during difficult times. It is almost as though Orwell’s Ministry of Truth is alive and well and living in Brussels. 

So who are these hitherto relatively unknown organizations, why do they wield so much apparent power, and why is it only now in extreme financial crisis that they are being taken seriously?

The main rating agencies are Standard & Poor’s “S&P”, Moody’s and Fitch Ratings. Their role, in extremely simplified terms, is to evaluate Bonds and other securities and evaluate independently the level of risk of each security. This should make the market more transparent and efficient as investors can readily assess whether to invest at all and/or which investments should carry a higher risk adjusted interest rate.

Between them the Big 3 provide ratings for most of the securities freely traded around the world, and such is the “credibility” of these organizations that major institutions such as insurance companies and pension funds follow more or less blindly their ratings. Thus huge capital in/out flows results from an up or down grading, leaving countries and companies alike potentially unable to raise finance.

Given this enormous power, these agencies like Caesar’s wife should be above reproach, but regrettably this has not proved to be the case in the recent past. A non exhaustive list of what many would describe as their grossly negligent shortcomings / blatant conflicts of interest include:

• Being too close to the management of client companies e.g. .Enron (Bankrupt)
• Being too close to Government agencies e.g. Freddie Mac & Fannie Mae (Bailed out)
• Having ownership structure not conducive to independence (Listed parent Co)
• Leaning on clients for other business using the rating as blackmail (Hannover Re)
• Operating as a de facto Cartel (Chinese Government established own Agency to escape)
• Rating structured products AAA which at best  were BBB (Subprime crisis + AIG bail out)
• Being in bed with Wall Street and an indirect instrument of US Government policy

It is clear that when two American agencies Moody’s and S&P stand together they own over 80% of the market and for a Sovereign Government out of favor with  US foreign policy, watch your back, perhaps your debt may get down graded by a completely “independent “ agency.

Interestingly, for all the colossal losses resulting from rating agency actions, or more importantly lack thereof, I am unaware of a senior executive who has lost their job or is being prosecuted.

They are therefore yet one more branch of the US financial aristocracy who de facto are above the law.

Shakespeare understood today’s financial crisis:

Shakespeare understood today’s financial crisis:

 “That struts and frets his hour upon the stage, and then is heard no more: it is a tale, told by an idiot, full of sound and fury, signifying nothing”

Over the past months we have heard, from a multiplicity of re-election seeking political idiots and bonus seeking financial fraudsters, of the EFSF, the ESM, the IMF, bail outs, the FED currency swaps, and the ECB with its LTRO. All of the above have been waved under the noses of the gullible public as a magic solution to the Euro problem.

Let’s for once put the record straight and state the realities in simple terms:

The first problem is that most major European banks, with total assets on average 40 times their equity, are completely bankrupt. They are kept alive by not having to record at market value their “investments” in Sovereign Bonds and other “risk free assets”. Many banks have also made disastrous commercial and real estate loans to economies, particularly in Southern and Eastern Europe. Now in deep crisis, these loans also are massively underwater.

To make matters worse, banks have been instructed under the Basel directives to “strengthen” their equity/lending ratios before June 30, 2012.

This can be achieved by raising new capital. Unicredit the Italian bank made a disastrous attempt to raise cash by a rights issue, which was so badly received by the market the share price dropped over 30%, leading to substantial losses for existing shareholders. This has severely discouraged other banks from doing the same.

The other means of improving ratios is by reducing lending, especially of course to small businesses. This is what the banks did in the US during the Great Depression, thus making the economy even worse.

The last is fire sale of assets, which the banks have been doing, selling viable business divisions, keeping the rest and liquidating Gold and other easily realizable holdings.

The second problem is that the Sovereign countries are themselves hopelessly over indebted, running ever increasing fiscal deficits and teetering on the edge of insolvency, and are in no position to contemplate bailing out their banks.

Many have urgent funding requirements to repay maturing debt, for massive amounts of money, not to mention financing the spiraling deficits. While much noise is made about Greece, France Italy and Spain require to raise EUR 100 – 150 Billion in Q1, 2012 alone.

The ever lengthening list of Sovereign downgrades, by S&P this weekend and recently by Fitch and Moody’s confirm a rapidly deteriorating situation. The desperate attempts by politicians to muzzle these agencies, and downplay the significance of these events, are pathetic.

The rating  agencies, which still follow developments rather than anticipating them, are now finally starting to do their job, after years of complicit actions to dupe investors, e.g. in the sub prime crisis.  Nonetheless, given their ownership structure and dependence on the financial sector and governments for much of their revenues, one can only doubt their degree of independence.

The bankers as always know full well the reality of the situation, and pay little heed to the rating agencies. The true measure of risk is whether banks will lend to each other in the interbank market. Banks are presently afraid to lend to each other as they know there is a serious risk of not being repaid. This problem reached crisis proportions shortly before Christmas.

A bank which can no longer obtain interbank finance goes to the ECB the “lender of last resort” which grants emergency loans, and takes a risk no other bank or sane investor would ever contemplate. Where does the ECB get this money, either from other banks, or from other Central Banks.

Presently the total assets on the balance sheet of the ECB are EUR 2,800 Billion, including massive loans to illiquid / insolvent banks, and a stockpile of PIIGS bonds no-one else wanted to buy.

This gargantuan balance sheet, greater that the GDP of France, is financed inter alia by loans from other Central Banks, including the Bundesbank with outstanding loans of EUR 500 Billion approximately, the FED, estimated to have advanced via a currency swap approximately EUR 1,000 Billion, and of course the surplus cash EUR 500 Billion presently deposited risk free by Banks afraid to loan to their peers, who prefer that the ECB takes the risk in their place.

With a paid up share capital of less than EUR 10 Billion, the ECB is leveraged 280 times and is surely the most bankrupt of all Central Banks.  If the ECB were to mark its investments to market, losses to other central banks, which ultimately mean the taxpayer, would be truly mind blowing.

So how can all these bankrupt countries and banks get the financing required to maintain the Ponzi scheme a while longer, particularly as Mrs. Merkel is strongly in favor of fiscal union, affectionately known as “FU”, but averse to printing money and making bond purchases?

Enter the new ECB boss, and former Goldmanite, the self styled “Super” Mario Draghi. He is infinitely smarter than the German Chancellor and has effectively bypassed her, by granting virtually unlimited loans to cash strapped Euro zone banks, against which the ECB will accept almost any form of security. This enables banks to offload worthless Sovereign bonds, at full book value of course, and perhaps even unwanted Christmas presents. These are 3 year loans, Long Term Refinancing Operations (“LTRO”). This is totally against the spirit of a Central Bank role of providing emergency overnight funding, but these days nobody seems to care.

The ECB hope was that banks once again flush with cheap liquidity, would buy up further Sovereign debt that the ECB was prevented from buying not only by its charter, but also of course by Mrs. Merkel.

The banks took the money EUR 489 Billion to date with more at end February, with open arms and immediately parked it back at the ECB. As one banker said, our shareholders would take a very dim view of investing in Sovereign debt when we can strengthen our own balance sheet, in advance of the Basel imposed capital requirements.

The LTRO so far has been a complete failure, but this will definitely not stop the ECB, whose priority is in saving the banks, doing the same thing over and over again, until perhaps eventually some money will flow into the Bond market.

This leads us to the EFSF, covered in a previous blog post. All attempts to raise significant capital have failed, and the idea of leveraging the fund was still born. Now the situation is much worse as the recent S&P credit rating downgrades have resulted in a downgrade of the EFSF itself.

The ultimate joke will come when the rescue fund, if it is ever funded, ends up with a lower credit rating than many of the countries it is designed to save!!!!!