At 15,000, who do you invest with? Or do you?

The Dow Jones Industrial Average (DJIA) hit 15,000 this week for the first time ever.  One main reason is that in the age of negative interest rates, there’s no other place for fixed-income depositors to go.  If they park their money in the bank, they lose because inflation eats their principal for lunch.  They want to play with house money, too.  The question becomes, who to invest with?  An ETF?  Or a celebrity hedge fund manager?

On 5/8/13 the Financial Times ran an illuminating article, “Tips from Wall Street hedge fund gurus fail to reward the faithful,” by Dan McCrum and Arash Massoudi where last year predictions from the managers were contrasted with simply passively tracking the DJIA with an index fund.  Two of the most high profile managers, Bill Ackman of Pershing Square and David Einhorn of Greenlight Capital, while successful, did not match the 22% profit gained by investing in an index fund.  Ackman focused on the underappreciated value of the retailer J.C. Penney, which turned out to be underappreciated for a reason: plummeting sales and profits.  The stock is down 37% since last year.   Einhorn made a good prediction on selling the yen against the dollar but his advice to sell shares in Martin Marietta Materials, “a building group boosted by government stimulus spending, would have lost 66% of their money.”

 
Hedge funds are not cheap.  You pay a 2% management fee and 20% of your profits.  In the meantime, withdrawals are capped at a few times a year.  My advice is: take the celebrities with a grain of salt.

Giving Credit Where Credit Is Due

My previous post on the reopening of banks in Cyprus and the capital control rules depended a great deal on the reporting of Liz Alderman of the New York Times.

Cyprus Lesson: Put Your Money In Your Mattress for the Good of the Country

The Troika (the European Commission, the ECB and the IMF) have made a sweeping power grab in Cyprus.  In exchange for a paltry bailout, Cyprus gave up its rights not only to negotiate its own affairs but to have free flow of capital.

Some of the capital controls imposed:

• Electronic transfer of funds from Cyprus to other countries is prohibited
• An individual cannot take more than 3000 euros in cash outside the country
• Credit and debit withdrawals are limited to 5000 euros a month
• Banks will not cash checks; they will only accept deposits
• Bank clients will not be able to withdraw from fixed-term deposits before their maturity

The ECB did its part.  It sent an airplane filled with 1.5 billion euros in a cargo container made of gold (only kidding about the gold—can’t let the Cypriots get ahead of themselves).

It’s estimated despite these “controls” some 10% of Cyprus’s 64 billion euros on deposit will be withdrawn today when the banks reopen.

The question I have is: how does this power/money grab improve the Cyprus situation?  Oh, that’s right.  It doesn’t.  Isn’t the point simply to put Troika managers in charge of all the Eurozone nation-states?

Thousands of employees will lose their jobs at Laiki Bank, the country’s 2^nd largest bank.  Businesses have not been able to pay their employees.  In a country dependent on imports, importers haven’t been able to pay their bills, raising the spectre of shortages and higher prices.

Under European Union treaties, restricting the free movement of capital is forbidden.  Critics say that what is happening in Cyprus shows that union rules will be flouted when the IMF (International Monetary Fund, the ECB (European Central Bank) and the EU (European Union)-THE TROIKA—leaders find it convenient to do so.

There is no need to fight bloody wars for treasure.  These are bloodless coups.  Where will it end?

Mortgage Giants Gouge the Taxpayers With No End in Sight

In Gretchen Morgenson's article in today's New York Times she dissects how much the government owned mortgage insurers Fannie Mae and Freddie Mac drain the tax-payer with no hope of recouping the money.  Because the private mortgage market won't step in, Fannie and Freddie insure mortgages up to $417,000.  Any monies they make go directly to the Treasury, not to taxpayers.

And they're still in the red costing taxpayers hundreds of billions of dollars:

Last fall, the regulator charged with overseeing Fannie and Freddie estimated that the taxpayer bill for the companies could be $200 billion by the end of 2015.

 The chief executives who ran the companies into the ground made huge amounts of money.  For instance, Franklin Raines, former head of Fannie Mae, was paid $90 million from 1998-2004.  He still is on the taxpayer dole after replacement.  Not only does the taxpayer guarantee retiree pensions, he/she also pays their legal bills:

[F]rom September 2008 through 2012, taxpayers also spent $114 million for legal bills racked up by former executives and directors testifying in lawsuits relating to the accounting scandals or financial crisis inquiries.

If this money was taken out of these entities and returned to the taxpayer, that amount alone could stimulate the economy further.

Cowardly New World: Nameless, Faceless II

To live desiring to be a robot or immortal through a machine is the sign of a death culture.  Witness The Singularity.  Or Ridley Scott’s Prometheus.  Why has the technology we so prize made us inhuman?

What kind of society is it when a human being is single-mindedly bent on becoming inhuman?  If you see the robot as perfect, then humanity in its organic messiness is the opposite.

If you stare at the abyss for too long, it stares right back at you (paraphrase).  You are a slave to the robot, don’t you see?  The robot is the master if that’s what you desire above all else.

Private Consultants Pocket Your Money

Semantics are key in governmental nomenclature.  Bribery is known as “lobbying”.  Siphoning off government money is known as “privatization.”

Because, theoretically, regulatory agencies like the Office of the Comptroller of the Currency do “not have the resources to ensure thatbanks follow the rules,” the agencies hire outside private contractors who are supposed to clean up major foreclosure problems such as mass wrongful evictions.

But just as with the credit ratings agencies like Standard & Poor’s, Moody’s and Fitch, who gave gold standard triple A ratings to mortgage-backed securities collateralized by liar loan pooled mortgages, the private contractors are paid by the banks they are supposed to be regulating.  There is little oversight.  In many cases, they are enabling the banks to cover up their crimes and collecting huge fees which are taken out of settlements that are supposed to go to aggrieved homeowners:

Over 14 months, the consultants collected about $2 billion in fees, according to regulators and bank officials.  Those fees amounted to more than half of what the homeowners will receive under the $8.5 billion settlement that ended the “flawed foreclosure review run by 8 consulting firms.”  As part of the deal, officials will disburse $3.3 billion to 3.8 million borrowers in foreclosure.

Who are these private consultants and how can I get into the action?  It’s part of the revolving door in Washington.  Consultants like PricewaterhouseCoopers employ many former Securities and Exchange Commission officials:

They won much of the foreclosure review work, signing deals with four banks, including Citigroup.  Promontory, the firm examining loans for Wells Fargo, Bank of America and PNC, was founded in 2000 by the former head of the Comptroller of the Currency, Eugene A. Ludwig.

So what’s wrong with that, you may think.  At least their employees are knowledgeable in ferreting out bank wrongdoing.  But the consultants and the banks collaborate in covering up criminality.  Hired by HSBC to investigate money laundering allegations, Deloitte and Touche generously undercounted the number of suspicious transactions:

Deloitte has also been suspected of helping institutions cloak illicit transfers of money to rogue nations around the globe.”

Since the financial crisis, the comptroller’s office has issued nearly 20 enforcement actions against banks that had already hired consultants to help iron out problems.

Instead of exposing foreclosure abuses, private consultants are enabling the banks to hide their criminality.  They get paid huge fees which come out of the hide of wronged homeowners.  In the Washington bubble, money and personnel circulate back and forth.

Doesn’t it seem like privatizing government functions is really a way to siphon taxpayer money from the 99% to the 1%?  Follow the money and the cow pies.

Too Big to Fail or Too Big to Jail?

If you knew your broker called a stock “toxic waste” and nicknamed it as “Subprime Meltdown”, “Hitman” “Nuclear Holocaust” and “Mike Tyson’s Punchout” (a reference to a bag of human waste), would you buy it? 

According to an article by Jesse Eisinger of ProPublica, on March 16, 2007, team members of Morgan Stanley suggested these nicknames for a financial derivative known as a collateralized debt obligation (CDO), the very products that were at the center of the systemic collapse in 2008.  Then they renamed it and sold it as gold to their investors.  Human waste into gold.  That’s some alchemy.

Not one Too Big To Fail (TBTF) bank has been held accountable for torpedoing the economy back in 2008.  The Justice Department and the Securities and Exchange Commission are seemingly unable to find any wrongdoing despite reams of evidence.   

The banks were bankrupt and had to be bailed out by the taxpayer.  Unsuspecting investors bought mortgage-backed securities and other fancy financial mechanisms that the banks knew were worthless.  But it took a Taiwanese bank, one of those unsuspecting investors, to overcome the high hurdle of document discovery to give us a glimpse of TBTF criminality.

The lawsuit concerned a $500 million collateralized debt obligation created by Morgan Stanley and named Stack 2006-1.  To understand what a CDO is, first you have to understand the mortgage-backed securities market.  Financial firms would buy mortgages from lenders (aka originators), pool them, and then slice and dice them into categories of risk known as tranches.  Each slice was a mortgage-backed security (MBS) which a firm could hold, trade and sell.   

To make a CDO, they pooled the mortgage-backed securities and sliced and diced them.  Both the MBSs and the CDOs inevitably received a triple-A gold plated rating from one of the three credit rating agencies: Standard & Poor’s, Moody’s or Fitch’s, who were being paid by the actual issuers of these derivatives so there may have been a conflict of interest in their analysis (you think)?

According to the documents revealed in court, Morgan Stanley knew the subprime mortgage market would collapse.  They then put together the worst MBSs they could to create Stack 2006-1 and short them (bet that they would default), and then sell them to unsuspecting investors who had no idea the bank’s first loyalty was to itself, not its clients.

The standard defense against this widespread double-dealing chicanery is that the buyers were sophisticated and should have known what was happening in the subprime market.  Besides, it was buried deep and wide somewhere in Stack 2006’s thousand-page deliberately opaque description that the bank might bet against the CDO.  The banks think this is symmetrical—each party has the same information--Morgan Stanley versus Taiwanese bank with both sides balancing the scales of justice.  But the information was asymmetrical with the investors left holding the bag and grievously harmed by lack of vital inaccessible information.

According to the disclosures, Morgan Stanley had private knowledge which led it to short Stack 2006-1 while they were extolling its value to its investors.  Does the definition of being a “sophisticated buyer” include being unaware that your bank is going to screw you by trading for itself and dumping its losses on you?

In an internal presentation to Morgan Stanley employees, the Stack 2006-1 was praised as displaying “attractive business opportunities for Morgan,” and “the ability to short up to $325 million of credits into the CDO.”

 In the end, of the $500 million of assets backing the deal, $415 million ended up worthless.

For its part, Morgan Stanley didn’t have to be very sophisticated to find out about the tanking of the subprime market.  They just walked down the hall to their colleagues who were conducting private assessments of the quality of the mortgages used in the CDOs.  These reports weren’t available publicly, another example of asymmetrical balance.  Morgan Stanley was holding all the cards and getting true information straight from the horse’s mouth:

In one email from Oct. 21, 2005, a Morgan Stanley employee warned a banker that the mortgages Morgan Stanley was buying from loan originators were troubled.  “The real issue is that the loan requests do not make sense,” he wrote.

As an example, he cited “a borrower that makes $12,000 a month as a operations manager of an unknown company—after research on my part I reveal it is a tarot reading house.  Compound these issues with the fact that we are seeing what I call a lot of this type of profile.”

What did the bankers know and when did they know it?

TIMELINE

Fall 2005:  Bank employees shared private assessments about the future tanking of the subprime mortgage market.

February 2006:  Morgan Stanley created Stack 2006-1 with the very same mortgages it knew would deteriorate expressly for the purpose of shorting it.

April 2006:  Morgan Stanley created an internal hedge fund consisting of employees who could assess which mortgages were more likely to fail and employees with access to private due diligence reports.

Early 2007:  Morgan Stanley realized that the subprime market was deteriorating even more rapidly than they thought.  They then went out to sell Stack 2006-1 CDOs touting them as safe and value-creating investments even though their proprietary bets went in the opposite direction.

To this day no financial firm has been held accountable for their bad (some say criminal) behavior.  As far as the future goes, we the people can look forward to mountains of toxic waste ready to bury us.