Wednesday, November 30, 2011

It's Not Speculation, It's a Sure Thing: When the Treasury Secretary is in charge of inside information

The financiers of Wall Street believe fervently in Social Darwinism.  They make so much money (watch out for those January 2012 bonuses) because they are better.  [Circular reasoning: also, they are better because they make so much money.]  Not that they’re lucky.  Or that they have a sure thing in a rigged game.

Take Goldman Sachs.  It can’t resist dividing up the world into winners and suckers.  In the late aughts GS had John Paulson, the notorious hedge fund manager enriched by shorting subprime mortgage market, choose a portfolio of lousy mortgage backed securities to create a synthetic collateralized debt obligation (CDO).  Then he bet against it. He made $1 billion on this one transaction.  GS got a $15 million fee.  It promoted the CDO as a great investment, telling buyers that an independent third party chose the portfolio.  If an investor got a whiff of Paulson’s hand in the mix, the CDO would’ve been toast.  So GS made out on the front and the back end, telling one story to its clients/suckers while enriching itself with the other.

After years of FOIA filings, Bloomberg News got the inside dope on similar Goldman Sachs double-dealing, which went all the way to the top.  On the same day that Treasury Secretary Henry Paulson told the New York Times that Fannie Mae and Freddie Mac were being vetted by the Federal Reserve and the Office of the Comptroller of the Currency and the results would cheer the market, he told a group of hedge fund managers at a meeting at the office of the hedge fund Eton Park in NYC that Fannie and Freddie were hemorrhaging losses, they’d be put into a structure called a conservatorship where the government would pump them with money to replace the heavy losses they were suffering from mortgage defaults, and their equity would be wiped out.  (Fannie Mae and Freddie Mac were private corporations with implicit government backing.  They bought and guaranteed 50% of the mortgages in the U.S. but they didn’t control the lax underwriting standards of the securitization daisy chain.)

The short version:

July 21, 2008 am--Paulson told the New York Times that Fannie/Freddie would be just fine
July 21, 2008 pm--Paulson told hand-picked hedge fund managers, many former GS employees, that Fannie/Freddie would tank.
July 21, 2008--Fannie Mae share price = $14.13; Freddie Mac share price = $8.75
September 6, 2008--Fannie/Freddie go into conservatorship; stock worthless.

Before Paulson was Bush’s Treasury Secretary, he was CEO and Chairman of Goldman Sachs (1999-2006).

Paulson gave his buddies a gift of insider information, defined as “material, non-public information”.  Straight from the horse’s mouth.  In essence the Treasury Secretary told a select group of people to short the hell out of Fan/Fred and walk away with wheelbarrows of money.  Their activity would have been buried within the plethora of investors shorting Fan/Fred anyway.
Records show that many investors were betting against Fannie Mae and Freddie Mac at the time.  According to Data Explorers Ltd., a London-based research firm, short interest in Fannie Mae shares rose sharply in July, from 86.3 million shares on July 9 to 163 million shares on July 14.  Short interest continued to rise, to 240 million shares, on the day of the Eton Park meeting: it hit 262 million on July 24, its high for the year.  Freddie Mac’s short interest showed a similar trajectory.
Isn’t what Hank Paulson did illegal?  Well, no.  As far as anyone can prove, he didn’t profit financially.  And “the rules for what can or cannot be disclosed by government officials are often either unclear or nonexistent.”  As Adam Zagorin, a senior fellow at the Project on Government Oversight, a Washington watchdog group, says:

”You can’t prosecute them for insider trading if they didn’t trade the shares.  You may not even be able to reprimand them.  What the hell are the rules?”

Paulson consulted with his Wall Street buddies many times during his tenure.

The question is: how brilliant do you have to be to make a bundle when the Treasury Secretary is spoon feeding insider information? 

Sunday, November 27, 2011

The Bloodless Coup in the Eurozone: Financial Totalitarianism Disguised as Democracy

Thousands of years and countless rivers of blood and treasure to decide European hegemony.  Athens was the birthplace of democracy.  Italy was the Renaissance capital of feuding royal states.

Now there is no need for bloody wars to decide the fate of European sovereignty.  The all-powerful Troika (the European Commission, the ECB and the IMF) has pulled off a bloodless coup , pushing out democratically elected officials in both Greece and Italy to replace them with unelected “technocrats” from a cozy financial network.

The word “technocrat” is efficient and innocuous.  It hides illegitimate leadership.  The word also disguises the incestuous relationships between the money men and women.

The bankers are in charge because the elected leaders of the Greek and Italian people couldn’t meet the demands of investors in their government bonds.  It’s not that the leaders didn’t try.  They were willing to face riots, strikes and vociferous opposition to do their bidding.  But all their efforts couldn’t calm the markets.  So the Troika put their own people in charge.

Lucas Papademos replaced Greek Prime Minister Papandreou, who had the temerity to suggest that the Greek people vote on austerity.  Papademos had been head of the Greek Central Bank when it joined the Eurozone:
Papademos was in charge when Greek officials lied about their fiscal position to the EU authorities and he presided over the failure of the Greek government to collect taxes from rich Greeks (like himself)…Greece is to be run by the very man responsible for getting them in this mess.
Even though Italy didn’t get a bailout, Prime Minister Berlusconi was pushed out and Mario Monti, another “technocrat”, took his place.    Monti worked briefly for Goldman Sachs, then became EU Commissioner for years, where he insisted on “liberalizing and deregulating” markets.  He is a close friend of the new head of the ECB, Mario Draghi, another Italian banker:
In the 1990s, when a number of countries, including Italy and Greece, engaged deliberately in credit swap transactions to take part of government debt and deficits off the official accounts with the connivance and help of Goldman Sachs in particular, Draghi was director general of the Italian Treasure and then joined Goldman Sachs (2002-2005).  Not even two degrees of separation: Draghi and Papademos both got their doctorates in economics at MIT in 1978.
Ex-French finance minister Christine Lagarde leads the IMF.  She headed up a global law firm that advised on “creative accounting” schemes for government debt.  Her deputy, David Lipton, used to work at Moore Capital, a global hedge fund.  Klaus Regling, who also worked at Moore Capital, runs the European Financial Stability Facility (EFSF), an entity created to provide bailouts. 

There is barely a quarter of the money needed for a true bailout fund in the EFSF (440 billion euros versus an estimated 2 trillion euros) but many investment houses have imaginative ideas of how to create a structured, tranched vehicle leveraged at four times the size of the fund.  These are the same ideas that demolished the housing market.  But no matter:
Fees from EFSF bond issuance will be worth 1% of a likely $100-billion of issuance to the big European banks and the likes of Goldman Sachs.  So they will be making good money out of the “bailout” funding.
The Greek people are not happy with their plight.  Says Alexandros Moraitakis, president of the Nuntius stock brokerage firm, most of whose employees have been laid off (in the past two years, the Greek stock market has lost 75% of its value):
“Greece does not decide, now the troika people decide, and they make experiments in the Greek market,” he says.  “Up to now they were unsuccessful.  Without growth, nothing will be done.”
Unemployment has doubled.  Even after two years of harsh measures, Greece is in recession and spiraling downward.  Not only has the Troika demanded austerity in exchange for bailouts, it has also put its own people in the indebted countries to oversee their progress:
[T]here’s widespread criticism that the troika is going to have a permanent office in Athens for the rest of the decade.

German Chancellor Angela Merkel has made clear that over-indebted eurozone countries must be closely overseen by international inspectors.
To lose sovereignty because of economic bumbling leading to German domination is the kind of poisonous tonic that topples governments.

Newspaper publisher and journalist George Kirtsos points out that statements by German politicians disparaging the Greek people have revived old memories of the brutality of the German occupation during World War II.

The Troika’s severe, almost punitive quid pro quo demanding not merely creditor sovereignty but crippling austerity is in stark contrast to the Marshall Plan (aka The European Recovery Plan or ERP), which was a large-scale American program to aid European economies devastated by World War II.  The U.S. allotted $13 billion for the plan.  In addition to the $12 billion it spent as a bridge covering the time until the plan came into affect, its cost was 10% of U.S. GDP of $258 billion.  17 countries were included.  The
European recipients didn’t receive the goods and services as a gift; they were loans to be paid back in local currency, usually on credit.

The Marshall Plan money was in the form of grants that did not have to be repaid.  In addition to ERP grants, the Export-Import Bank (an agency of the U.S. government) at the same time made long-term loans at low interest rates to finance major purchases in the U.S., all of which were repaid.
 In the case of Germany there also were 16 billion marks of debts from the 1920s, which had defaulted in the 1930s, but which Germany decided to repay to restore its reputation. This money was owed to government and private banks in the U.S., France and Britain. Another 16 billion marks represented postwar loans by the U.S. Under the London Debts Agreement of 1953, the repayable amount was reduced by 50% to about 15 billion marks and stretched out over 30 years, and compared to the fast-growing German economy were of minor impact.

As Kirstos said, “[I]f you want to do nation-building and force the Greeks to pay the price for the German nation-building in Greece, this is something that cannot be done in political terms.”

Anti-German statements are everywhere:

There are growing fears that Germans are plotting to buy Greek monuments and islands on the cheap, and there’s a revival of anger over Greek demands for compensation for Nazi atrocities

The occupying overseer from the Troika is referred to as the Gestapo.

Now that the “technocrats” are in charge, what’s the plan?  More public sector spending cuts, higher taxes, massive privatization of state assets and other measures to ensure that all the bonds held by the European financial sector are paid back in full and there is no default. 

Even though Greek private sector debt got a 50% haircut, the average Greek will still suffer a 30% reduction in living standards over the next decade.  And government debt will be at least 120% of GDP by the end of the decade at best, burdening the next generation with repayment into the following generation. 

The same problem besets Italy.  As 58-year-old Pietro Pappagallo, an Italian citizen from Bari, said:

”I’m worried about my savings that could become waste paper.  All the efforts to put something aside and I won’t get anything for it.  I’ve already faced four changes of my pension.  I had planned my life out and now they say I have to work more.  As a father, I worry for my children, who will probably never have a pension.”

The Troika (de facto, German Chancellor Merkel) wants many things: financial capital paid in full, no default, punitive measures against profligate nations “to toe the line on fiscal prudence and run balanced budgets and get their debt down so that the burden of taxation on the profits of the capitalist sector can be reduced.” 

Does it matter that the very people calling the shots today were the ones helping these governments hide their debts for fat fees?  It should be recognized and shouted to the rooftops that democracy is merely a cover for financial totalitarianism.  A sharp rebuke from the Troika and both democratically-elected Papandreou and Berlusconi were ejected.  Generations of the lower 99% who had little or nothing to say about complex financial transactions disgorgin fees here and there will live out diminished lives with little expectation of change.

The sick joke of it all is that austerity as a program of economic growth doesn’t work:

The reality is that, despite all the efforts of the social democrat leaders in adopting “neoliberal” policies of fiscal austerity, privatization, reduction in pension benefits and the destruction of labor protection laws, Greece will still not meet the targets set by the Troika.

Maybe the endgame isn’t austerity.  Maybe it’s privatization: picking off priceless assets for fire sale prices.  The vultures are circling.

Tuesday, November 22, 2011

Wall Street vs. OWS: Do the crime and don't do the time

What’s the score?  Let’s go to the videotape:

In one corner, thousands of Occupy demonstrators evicted, pepper sprayed, violently yanked, penned like animals, and arrested.

In the other corner, there’s the FIRE (financial, insurance & real estate) sector.  Recent example: MF Global hedge fund racing to bankruptcy in the last week of October.  Nothing to see here.  Move along.  No arrests, no convictions, no perp walks.  Just massive looting.  It couldn’t keep its hands off all that luscious customer money.

First $600 million of customer money was missing.  Now as much as $1.2 billion may be gone.  What’s a few 100 millions between newly minted enemies?  It seems that MF Global is guilty of sloppy bookkeeping.

The FBI and federal prosecutors are mobilized and they have an answer.  How does the NY Times put it?:

[Their] inquiries have increasingly homed in on the theory that much of the customer money had left the firm.

That sounds like customer greenbacks sprouted legs and arms, sauntered into the street and hailed a cab.

That money left and it ain’t coming back:

No one at MF Global, including its former chief executive, Mr. Corzine, has been accused of wrongdoing.

You know what’s coming back?  History, in the form of repeating itself.  Despite the obvious mountains of evidence that Wall Street caused the 2008 economic collapse that’s still playing out as a massive redistribution of wealth from the bottom to the top, no one was held accountable:

The fallout from the collapse of MF Global has renewed calls for tougher regulation of the futures industry, which has long relied on the principle that customer money is always safe.

In other words, trust the fox to guard the hen house.  Any regulator (think Elizabeth Warren) or politician (think Dodd-Frank) who remotely hints at oversight is crushed in an extortionate vise.

Days before its Chapter 11 filing…MF Global was taking what amounted to free loans from its clients.

No one at MF Global is charged with any crime.  Sloppy bookkeeping.  The customer money marched out the door.  If you park your money on Wall Street, you’re a sucker.

Tuesday, November 15, 2011

The ECB Puts the Screws On the Italian People

From the beginning, the European Central Bank (ECB) made its choice: Euro banks get unlimited liquidity while sovereign nations must institute painful austerity programs in exchange for bailout crumbs.  GDP growth is declining in general but in “good” countries like Ireland, which did everything the Troika asked for, unemployment increased exponentially and the misery index went vertical.

Italy is now the focus.  Investors are demanding ever higher yields on Italian debt, which leads to dropping asset prices and collateral calls, and then Italy has to pay even higher yields until it can no longer cover the cost of running its government.  If Italy goes, there goes the eurozone.

Even with Berlusconi gone, replaced by Prime Minister-designate Mario Monti who cut his teeth at Goldman Sachs, on Monday Italy had to pay almost 100 basis points more (6.29%) than it did a month ago for a 5-year bond (5.32%).  Its 10-year bond yields at 6.77% increased to more than three times that of the 10-year German bonds.

Popular sentiment is that the southern euro countries are getting what they deserve for profligate spending and widespread corruption.  But Italy has been a solvent nation with the economic resources to service its 1.9 trillion euro ($2.6 trillion) debt.  Italians save at a higher percentage of income than Americans.  As events escalate, facts fall by the wayside and investor fear and distrust take over.

The Federal Reserve in the U.S. acts as lender of last resort if necessary and puts the full faith and credit of the United States behind its massive IOUs.  Buyers still flock to the perceived safety of Treasury bonds despite its recent ratings downgrade from AAA to AA.  The 10-year U.S. Treasury bond yield is 2%.  The ECB emphatically refuses to expand its single mandate, fighting inflation, to include issuing Eurobonds, which would lower bond yields for suffering nation-states.  It fights fiercely to dispel the impression that it might backstop the debt of a country whose bankruptcy could drag other countries down with it.  French banks, for instance, have large holdings of Italian sovereign bonds.  

The ECB is not above manipulating markets to achieve the results it wants.  

There are memos indicating that it held back on purchasing Italian bonds in order to force out Berlusconi.  The ECB could float the perception that it would backstop accelerating debt.  That might be enough to calm investor fears and drive down bond yields.  Since last year it bought 187 billion euros’ worth ($256 billion) of sovereign bonds on the open market.  That’s a drop in the bucket.

The financial-industrial complex is firmly in place.  The Troika has already installed their own people as overseers to police the austerity program.  Mario Monti, economic technocrat, has already 
outlined plans to upend the Italian system:
In Italy, Prime Minister-designate Mario Monti began talks to create a new government of non-political experts as a letter has appeared outlining Italy’s plans for austerity including plans to cut 300,000 public-sector jobs by 2014, raise the pension age and cap the amount of debt local governments can carry.
Without an ECB nod in the direction of Eurobonds or operating as the lender of last resort, a psychologically-driven endgame can lead to countries falling like dominos into bankruptcy.  But the Germans are in charge.  Their people are vociferously opposed to any accommodations for its southern neighbors even if they bring themselves down in the interim.  They fear inflation.  Historically, it’s hurt them badly.  Most economists dismiss that result as the entire eurozone, impacted by overwhelming debt and austerity programs head into double-dip recessions, higher unemployment, higher taxes, spending cuts and lack of demand.  However, without the consent of Germany, the strongest economy in the euro area, there doesn’t seem to be a force strong enough to prevent Ferraris from driving straight into a brick wall.

Saturday, November 12, 2011

Standard & Poor's shoots France in the head, then says it's sorry. Time for a duel.

In the midst of the Eurozone/Euro mess, as the troika (the European Commission [EC], the European Central Bank [ECB] and the International Monetary Fund [IMF]) work furiously to contain (didn't Bernarke claim “containment” re: subprime disaster in 2007?) the contagion of investor panic and debt yields rising to unsustainable levels, Standard & Poor’s “accidentally”sent out an "erroneous" email on Thursday suggesting that it lowered France's triple-A rating.  Not that it was planning to lower it, but that it already had.

Hmmm.  Can it be a coincidence that the EC is planning to issue new rules on credit ratings agencies in a few days?

In the U.S. we've already seen the damage wrought by the three Stooges, Standard & Poor's, Moody's and Fitch's.  They plastered triple-A ratings all over toxic waste mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs--which entail pooling MBSs and slicing them up).  As the true nature of these putrid instruments revealed itself, the credit ratings agencies downgraded the obtuse structured financial vehicles to junk bond status, sometimes dropping them several notches within a week.

Because the issuers of the "debt" pay the agencies to rate them, the conflict of interest was (and still is) evident.  The agencies have strong incentive to lie upwards and they did to a fantastic degree.  Unfortunately, the damage was done.  Pension funds and other fixed income cash cows were caught holding the bag.

In the U.S. the credit ratings agencies hide behind the First Amendment.  Their legal argument is that they cannot be held accountable because they are merely issuing "opinions".  It's your tough luck if you take them seriously.  You rock the financial world, not them.

The European regulators are trying to put protections in.  A draft released earlier this week made that clear:

European supervisory authorities would be able to temporarily prevent the issuing of ratings on countries in "a crisis situation."

Investors would also gain a framework to take legal action against agencies "if they infringe intentionally or with gross negligence" on their obligations.  A ratings agency would also have to disclose information about is rating methodologies.

Standard & Poor's errant email went out on Thursday just before 4pm Paris time when the European markets were still open.  Its "opinion" thrust a knife into "containment".  The yield for France's 10-year bond jumped 25 basis points to 3.48% and the spread between 10-year French and German bonds hit 1.7%, a euro-era record.  S&P waited 2 hours to issue a correction, after the European markets had closed.

A shot across the bow, eh?  A bit of nasty extortion.

Wednesday, November 2, 2011

"Calling All Liberals: It's Time to Fight"

We need a coherent, muscular liberal narrative.  The Occupy Wall Street movement, quickly spreading globally and heroically taking on all challenges, has lit the match.  Now it’s time for the rest of us to stand together.  We have to stitch together the disparate movements and rumblings: Fighting to defend teachers, cops and other public sector workers; battles in Wisconsin and Ohio; organized movements like Rebuild the Dream and Tavis Smiley’s Poverty Tour.

People say, what’s wrong with President Obama?  Why isn’t he standing up for the progressives?  (Of course, people have been saying that since he was President-elect.)  In the 11/7/11 issue of The Nation, Benjamin R. Barber builds his Fighting Liberal theory in a concrete foundation:

We need to recall what FDR said to A. Philip Randolph when the Pullman Porters Union president complained bitterly about how Roosevelt wasn’t backing the union’s struggles.  “Make me do it!” said Roosevelt.  Liberals need to stop blaming Obama and make him do it.

The Zuccotti Park (Liberty Plaza) congregation fights for liberty as a public good.  Humans live in social relationships.  They are citizens, not consumers, and in a democracy citizens are the government:

Taxation, far from being a bureaucratic scam to steal our hard-won earnings by some alien “them” or “it”, is the way citizens pool resources to do public things together they can’t do alone.  Attacking the power to tax is attacking the power of the people to spend their money in concert to achieve important public goals, whether national defense, public education or social justice.  The anti-tax ideologues pretend to protect us, but in truth they disempower us.

If you don’t think we’re the tail wagging the dog of technology, chew on this bone:

A Chinese company that partners with Apple plans to replace thousands of its Chinese Foxconn workers with up to a million robots.

Foxconn workers, eh?  Sigh.  All those suicides and deprivations gone with the wind.

A fighting Liberal Narrative must oppose radical marketization—the predatory capitalism that increases productivity and profits without creating jobs.

There has to be a new metric, a new blasphemous paradigm along the lines of the sun as the center of the universe around which the earth rotates as opposed to the centuries-old belief that the earth was the center of the universe.  Get rid of the politicized, shopworn accounting tricks calculating the GNP:

The social dimensions of employment maybe be an externality [an externality is something apart from an agreement yet derives from it], but it is crucial as to why work matters and should be at the center of a fighting liberal vision.  It also explains why liberals should propose a new metrics that includes indicators of social goods and human happiness when we measure, for example, GNP. 

Why are the creative contributions of artists, teachers and scientists not part of national product?  Why aren’t environmental costs a debit?  The current system in effect socializes the invisible public costs of capitalism, spreading them across the backs of taxpayers while privatizing the visible profits.  This is not capitalism but corporate welfare—socializing risk for the rich and powerful while leaving the poor to the social Darwinism of a pitiless marketplace.

We liberals want to rebuild the dream and the Occupy Wall Streeters are marching for it.  Freedom is public—a shared product of strong democracy.  More money is not one man, one vote.  It’s Orwell’s Animal Farm, “Some are more equal than others.”