Preserved for posterity: The lies of the IMF, Euro Commission, and ECB

Alberto Nardelli, The Guardian:

Greece would face an unsustainable level of debt by 2030 even if it signs up to the full package of tax and spending reforms demanded of it, according to unpublished documents compiled by its three main creditors.

The documents, drawn up by the so-called troika of lenders, support Greece’s argument that it needs substantial debt relief for a lasting economic recovery.
…
The second document in the pack of six, titled Reforms for the Completion of the Current Programme and Beyond, show there was less to this offer than suggested by commission president Jean-Claude Juncker and Germany’s vice-chancellor Sigmar Gabriel. The cash on offer is not an ad hoc investment but is actually an EU grant that is regularly available to all member states. And, as Süddeutsche Zeitung points out, accessing the cash requires a 15% co-financing in Greece’s case, which it cannot afford.
…
A third document outlines the “financing needs and draft disbursement schedule linked to the completion of the fifth review”, spelling out how Greece would have received €15bn to meet its obligations until the end of November. The cash would have been handed over in five tranches starting in June (as soon as the Greek parliament approved the proposals) to cover Greece’s financing needs. However, 93% of the funds would have gone straight to cover the cost of maturing debt for the duration of the extension.

So, the Troika handed Greece a time bomb and, in exchange, demanded that they slash pensions, raise health co-pays, and make their taxes more regressive. Unsurprisingly, Greece is handing the device back to Europe.

Added: Deutsche Welle has picked up this meme, though without the documents from Suddeutsche Zeitung that The Guardian reported.

And The Independent, again without mentioning the SZ.

Oh yes, that bank bailout

Robin Harding and Tom Braithewaite at the FT reports that the Fed is balking at exiting its purchase of assets from the banks to keep them from going under. At the moment, it holds $ 1.6 Trillion and is expected to purchase $1T more. At the moment, it’s paying at 0.25%, or just $4B/year. But the exit plan is to get interest rates back to 2% before regurgitating that much paper. That would be over $50B, which is more than the profits at the biggest banks. Bad optics, you know.

And then there’s the question of losses that the Fed may take. They didn’t get to buy all that paper because the banks thought it was profitable. They got to buy it because the banks thought it was manure. While I doubt they’ll lose all that much (and they can just raise their assessment on the member banks), it will become a matter for public comment.

And justifiable rage.

Blackbox banks

Via Ritholtz, an interesting article by Frank Partnoy and Jesse Eisenger, The Atlantic, on the financial system, especially investment banks. A sample:

Some four years after the crisis, big banks’ shares remain depressed. Even after a run-up in the price of bank stocks this fall, many remain below “book value,” which means that the banks are worth less than the stated value of the assets on their books. This indicates that investors don’t believe the stated value, or don’t believe the banks will be profitable in the future—or both. Several financial executives told us that they see the large banks as “complete black boxes,” and have no interest in investing in their stocks. A chief executive of one of the nation’s largest financial institutions told us that he regularly hears from investors that the banks are “uninvestable,” a Wall Street neologism for “untouchable.”

That’s an increasingly widespread view among the most sophisticated leaders in investing circles. Paul Singer, who runs the influential investment fund Elliott Associates, wrote to his partners this summer, “There is no major financial institution today whose financial statements provide a meaningful clue” about its risks. Arthur Levitt, the former chairman of the SEC, lamented to us in November that none of the post-2008 remedies has “significantly diminished the likelihood of financial crises.” In a recent conversation, a prominent former regulator expressed concerns about the hidden risks that banks might still be carrying, comparing the big banks to Enron.

The only justifiable reason to worry about the banks because there isn’t effective regulatory oversight. We all know what the situation is: in very round numbers, 10 million people were unexpectedly unable to pay their mortgages with a face value somewhere above $1T. A similar, though lesser, situation obtained for businesses. The actual losses those represented were much smaller, since (as long as it is maintained) a house remains an asset even if it is vacant. The true losses are the mortgage payments. Those might represent $100B/year, as long as the home or commercial property remains vacant. Those true losses have to be accounted for through reduced bank profits or taxpayer assistance. In what amounts to profitable banks (especially past profits) propping up banks through the Federal Reserve giving sweetheart loans, we are gradually working through the inventory of vacant homes, the losses to the banking system are falling, and things are getting back to normal.

Unless they are not. The problem is that, while we know that mortgage lending standards have improved, there isn’t much to keep them from going off the rails again. And certainly as long as the banks keep their books secret and their practices immune from regulatory oversight, investors will want exceptional assurances from them. Who wants to buy a pig in a poke?

“Who? Us?” –JP Morgan

Interesting news is pouring out at holiday time.

Katarzyna Klimasinska, Bloomies:

JPMorgan Chase & Co. (JPM) is being investigated over potential power-market manipulation that inflated payments for electricity, according to the U.S. Federal Energy Regulatory Commission.

The FERC, which has pledged to combat manipulation of prices, began its probe after reports last year of bidding practices by JPMorgan that the California and Midwest grid operators deemed to be abusive, according to documents provided by the Washington-based agency.

“Three of the bidding techniques had together resulted in at least $73 million in improper payments,” the agency said in documents filed yesterday, citing estimates by the two system operators.

Morgan response: “Who? Us?”

Also under FERC investigation/scrutiny: Deutsche Bank, Constellation, Barclays.

Lysistrata lives!

Too delicious for words. Not sure whether via Avedon, Ritholtz, or who. Anne Sewell, Digital Journal:

Spanish banks have come under fire recently for many reasons, including foreclosures on thousands of homes. Madrid’s high-class escorts are getting revenge.

The ladies have taken it on themselves to regulate the Spanish banking sector by withholding sexual favours from bank employees.

RT reports that in the Spanish capital, Madrid, the largest trade association for luxury escorts has started an indefinite strike. They say that until bankers return to providing credits to Spanish families and also small- and medium-sized businesses, there will be no sexual pleasures for their employees.
…
The Mexican news website, SDPnoticias.com, reported that the bankers became so desperate that they even called in the government for mediation in the issue.

I now predict an early resolution to the European crisis.

Lysistrata lives!

Gary Webb’s revenge: the truth about US government involvement in drug trade continues to leak out

The revenge of the just is that eventually the truth gets told. Even if the contributions to the process of the heroes of journalism are forgotten, lies never become true, while the truth waits for us to honor it. The big lie is that the US government is waging a war against drugs. The reality is much more complex. Yes, some elements of the US government intercept and destroy drugs. Other elements of the government allow persons working on behalf of our government to suppress an overabundance of democracy in Latin America to bring drugs to the US as payment; in some cases, drug money has financed US black operations and even small wars, such as that waged by Chiang Kai Shek after he had been evicted from China, and never has the US succeeded in intercepting enough drugs to do more than raise the profitability of the trade.

Gary Webb exposed this in his Dark Alliance series. The Washington Post, which has long had ties into the CIA and the rest of the intelligence…eh, community… and Howard Kurtz in particular began a campaign of ridicule. The San Jose Mercury rewarded Webb by banishing him. He committed suicide. The major media’s despicable obituary on the life of this good man was renewed ridicule.

But the truth remains true, while lies remain lies. So, the CIA’s own Inspector General Fred Hitz largely substantiated Webb’s general finding. And even so, the major media–preferring to damn themselves in the afterlife as they have damned themselves in the present one–refuse to give Webb the honor he is due. I would not want to be Howard Kurtz when the time comes to settle the bill with God. And so truth, working quietly and patiently, continues to heap coals on their heads. The latest is an article by Ginger Thompson of the New York Times:

Undercover American narcotics agents have laundered or smuggled millions of dollars in drug proceeds as part of Washington’s expanding role in Mexico’s fight against drug cartels, according to current and former federal law enforcement officials.

The agents, primarily with the Drug Enforcement Administration, have handled shipments of hundreds of thousands of dollars in illegal cash across borders, those officials said, to identify how criminal organizations move their money, where they keep their assets and, most important, who their leaders are.
…
The high-risk activities …. blur the line between surveillance and facilitating crime.
…
…former officials said that federal law enforcement agencies had to seek Justice Department approval to launder amounts greater than $10 million in any single operation. But they said that the cap was treated more as a guideline than a rule…

It’s Operation Fast and Furious, but with wads of cash instead of guns. And we know how well Fast and Furious went.

The Times remains wonderfully incurious about whether any of the cash we’re investing in researching money laundering goes missing in the wash and, if so, to whom. Anyone who has followed the story over the 70 years that it deserves can feel quite certain that what goes missing ends up paying off our covert so-called assets. You know, the people that make sure that we intercept 10% of the drugs and no more.

David vs. Goliath^ 7.5

Goldman Sachs has assets of $933B. The Lower East Side Peoples Federal Credit Union has assets of $30m.

This makes Goldman 31,000 times larger than Peoples Federal Credit.

Let’s assume David was 5 feet tall.

To keep the Goldman/People ratio the same as the Goliath/David ratio, Goliath would have to be 155,000 feet (29 miles) tall. Since in the book of Samuel, he was roughly nine feet tall, that means Goldman is Peoples^7.5

Now here’s the rest of the story:

The trouble began three weeks ago when the occupiers suddenly found their donation buckets filling with thousands of dollars, way more than needed for their pizza dinners. Suddenly, the anti-bank protesters needed a bank. Citibank and Chase certainly wouldn’t fit. So OWS opened an account at the not-for-profit Lower East Side Peoples Federal Credit Union. Peoples has a unique federal charter – designated to open accounts for low-income folk from all over NewYork…

Goldman Sachs had also joined up with the Peoples bank… giving the credit union $5,000 toward the little bank’s 25th anniversary celebration dinner. …

When a Goldman exec saw its gilded name next to Occupy Wall Street, the financial giant expressed much displeasure. In fact, my sources say, Goldman threatened legal action unless the credit union gave up the $5,000 and reprinted the invite sans the Sachs moniker….

But there’s a lot more at stake in this battle than a $5,000 donation gone wrong. Underneath, it’s a battle royal for control of tens of billions of dollars in government mandated “community reinvestment” funds.

In 2008, the US Treasury handed Goldman Sachs a check for $10bn from the Troubled Asset Recovery Program (Tarp)…Secretary of the Treasury Henry Paulson transformed investment bank Goldman into a commercial bank overnight….

But there was a catch: Goldman would have to return a chunk of the public’s billions in the form of loans for low-income customers and members of its “community”, as required by the Community Reinvestment Act (CRA) of 1977. Problem: Goldman has, it seems, no low-income customers, nor a “community”. Goldman was directed to find poor people and a community and hand over some cash.

So Goldman looked down from its riverfront tower in lower Manhattan and discovered Peoples….

For the big money-center banks, the CRA is good deal. They pay some blood money into community banks and offload their low-income customers. …

The billions of dollars in CRA funds (Citibank alone committed $115bn over ten years) have given community banks tremendous political authority at the local level….

Goldman has so far only passed out its legally-required CRA funds with an eye-dropper: the $5,000 for Peoples (now withdrawn), and a few other dabs here and there. The big cash investments from the Goldman fund are dangling, hoping to lure only those community banks and low-income funds that will dance to Goldman’s tune.
…
These Community Reinvestment funds ultimately come from public pockets, so why should the titans of Wall Street be allowed to bully community credit unions, which are answerable to their members, not Goldman’s partners?

With additional reporting by Arun Gupta, founding editor of the Occupied Wall Street Journal

Goldman Sachs is a political action committee and fixer/briber-extraordinaire, not a bank. And Peoples, which declined to cave into Goldman’s pressure, is a nest of angels.

Reforming the Fed

Bernie Sanders has a summary of the GAO report on the conflicts of interest at the Fed here.

Speaking of impunity:

Stephen Friedman, the Chairman of the New York Fed, sat on the Board
of Directors of Goldman Sachs, and owned shares in Goldman’s stock, something that was
prohibited by the Federal Reserve’s conflict of interest regulations. Mr. Friedman received a waiver from the Fed’s conflict of interest rules in late 2008.
…
The GAO found that the Federal Reserve Bank of New York consulted with General Electric on the creation of the Commercial Paper Funding Facility established during the financial crisis. The Fed later provided $16 billion in financing to General Electric under this emergency lending program. This occurred while Jeffrey Immelt, the CEO of General Electric, served as a director on the board of the Federal Reserve Bank of New York.
…
Jamie Dimon, the CEO of JP Morgan Chase, served on the board of the Federal Reserve Bank of New York at the same time that his bank received emergency loans from the Fed …
In March of 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns. During this time period, Jamie Dimon was successful in getting the Fed to provide JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. Dimon also convinced the Fed to take risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired this troubled investment bank.
…
While Congress has mandated that the Federal Reserve’s board of directors consist of experts in labor, consumer protection, agriculture, commerce, and industry, only 11 of the 202 members of the Federal Reserve’s board of directors represented labor and consumer interests from 2006-2010.
…
Of the 108 Federal Reserve board directors, 82 were the President or CEO of their company.
The Federal Reserve claims that it is hard to recruit labor and consumer representatives to its board because many are “politically active,”… According to the Center for Responsive Politics, [JPMorgan CEO Jaime] Dimon has made over $620,000 in campaign contributions since 1990.

Laws are meant for little people.

The new crisis de jour: Fannie and Freddie/updated

Merkel and Sarkozy have agreed to do something, details to follow, to keep the Euro banks from collapsing. Their new-found urgency arose from the imminent collapse of the Belgian financial services company Dexia, whose retail banking arm is holding bad debt. It will be carved up into a “good bank” and a “bad bank,” with the “bad bank” holding assets of nominal value ca. $130B.

Let me harp a little on the mechanism for the crisis. The banks are holding a combination of cash, mortgage derivatives, municipal bonds, corporate bonds, and national bonds, not to mention the odd dog or cat. These constitute their assets. They are required to hold a certain level of assets relative to liabilities to be considered solvent. Their profitability is based on the interest rate at which they can lend relative to the interest rate at which they can borrow.

If people are unemployed, as in the US, they can’t pay their mortgages, so those default at a higher rate. But the same risks apply to the other assets, even cash. If the dollar falls, and your obligations are denominated in Euros, you get squeezed. There’s been a big problem because many Eastern European mortgages are denominated in Swiss Francs. As the Swissy rises, those mortgages become more and more expensive to service.

The uncertainty in the value of assets means that it is much harder for banks to borrow cheaply. So, their profitability falls, which can threaten their solvency. In the US, we solved this problem by letting the banks borrow at essentially zero rates, so that any loans they made would be profitable–as long as the borrowers did not default. So, of course, the banks bought things like Treasuries and Agencies. Agencies are mostly Fannie and Freddie bonds, bundled US mortgages, which the US government offered to guarantee.

So, this brings us to the next shoe to drop. Asian and Middle Eastern investors are, according to the FT, “spooked” by the financial terrorism being practiced by Republicans in Congress. Which only goes to show that they are paying attention. Korea and Kuwait have pulled the ripcord on Agencies, and Japan is not going to buy any more. Brazil, Russia, India and China didn’t say anything: they just stopped buying. Yen-denominated debt issued by foreigners, so-called “samurai bonds” are also drying up.

Update: And another shoe has been identified: exposure of US banks to second mortgages, which John McDermott of FT Alphaville estimates at more than $70B over existing write-downs for just Citi, JPM, Wells Fargo, and Bank of America. If these are brought into default because of renewed recession/job loss, banks could be forced to re-capitalize.

The net upshot is that creditors want higher interest rates to compensate for increased risk on everything from Greek debt to Agencies to samurai bonds. If this happens, the value of assets held by banks declines, making them less well-capitalized, and therefore less able to lend. Interest rates go up. The economy slows down. Banks are in trouble.

But you see, there’s one more angle to all this. While conventional banks get burned by uncertainty, investment banks thrive on it. Like most retail investors, I have had a terrible investment year because productive assets like stocks have fallen. But in one area, I’ve done remarkably well. On a medium term volatility trade, called VIXM, I made an annualized profit of 64% (exclusive of taxes and commissions) by buying when the $VIX index was around 20 and selling when it hit 40. But on the short-term volatility trade, I made a 193% annualized profit by buying around 17 and selling around 48 (**). At the height of the 2008 crisis, VIX hit 80. Such supercharged profits are possible only when there is high volatility. Instead of owning a stock, take out insurance on it, and burn it to the ground.

The people who thrive on volatility need a crisis. If Merkel and Sarkozy are getting serious about solving Europe’s problems, a new crisis has to be ginned up. Republicans in Congress, whether knowingly or not, are contributing to volatility by making it seem as if they are willing to default on US debt. And in so doing, they are making a new crisis inevitable.
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**Please note: I do not recommend VIXY and VIXM. ProShares takes a huge bite, and you have to watch these things minute-by-minute. During September, VIXY swung by 37%, while VIXM was more or less as volatile as the S&P. Also, please note that an annualized profit is very high because this all took place over a few months. The actual profit was much smaller. One has to repeat the win again and again to actually book such profits.

Which side are you on?

Ed Vulliamy, The Guardian:

On 10 April 2006, a DC-9 jet landed in the port city of Ciudad del Carmen, on the Gulf of Mexico, as the sun was setting. Mexican soldiers, waiting to intercept it, found 128 cases packed with 5.7 tons of cocaine, valued at $100m. But something else – more important and far-reaching – was discovered in the paper trail behind the purchase of the plane by the Sinaloa narco-trafficking cartel.

During a 22-month investigation by agents from the US Drug Enforcement Administration, the Internal Revenue Service and others, it emerged that the cocaine smugglers had bought the plane with money they had laundered through one of the biggest banks in the United States: Wachovia, now part of the giant Wells Fargo.
…
More shocking, and more important, the bank was sanctioned for failing to apply the proper anti-laundering strictures to the transfer of $378.4bn – a sum equivalent to one-third of Mexico’s gross national product – into dollar accounts from so-called casas de cambio (CDCs) in Mexico, currency exchange houses with which the bank did business.

…the total fine was less than 2% of the bank’s $12.3bn profit for 2009.

So, one bank laundered 378 Billion dollars from just one country, at least $20B of which was probably from the drug cartels. HSBC is also under suspicion. No one has gone to jail.

Is there a dividing line between corporations and criminal enterprises any more?