December 31, 2012

Banks Deeply Involved in FBI-Coordinated Suppression of “Terrorist” Occupy Wall Street

If you had any doubts of the veracity of former IMF chief economist Simon Johnson’s depiction of the financial crisis as a “quiet coup,” a pre-Christmas release of FBI documents should put them to rest. While I linked to a discussion of the results of the Partnership for Civil Justice’s FOIA of FBI materials on Occupy Wall Street, I was remiss in not writing them up earlier. Both the Partnership for Civil Justice and Naomi Wolf at the Guardian (hat tip Scott A) provide good overviews. The PCJ also published the FBI documents it obtained.

If you’ve been following the story of the official response to Occupy Wall Street, it was apparent that the 17 city paramilitary crackdown was coordinated; it came out later that the Department of Homeland Security was the nexus of that operation. The deep FBI involvement is a new and ugly addition to this picture. Several impressions emerge from reading the summaries and dipping into the FBI documents:
The FBI deemed OWS to be a terrorist organization and went into “guilty until proven innocent” mode. Many of the FBI descriptions of possible OWS actions or those of affiliated organizations like Adbusters consistently look to have taken the most inflammatory snippets and presented them out of context.
The FBI also seems to believe that there is no such thing as peaceful protest, that any non-violent activity has the potential to turn violent and therefore should be treated as violent. One document to corporate “clients” warned:
Even seemingly peaceful rallies can spur violent activity or be met with resistance by security forces. Bystanders may be arrested or harmed by security forces using water cannons, tear gas or other measures to control crowds.
The banks were deeply involved in the effort to put down OWS. The executive director of the PCJ stated, “These documents also show these federal agencies functioning as a de facto intelligence arm of Wall Street and Corporate America.” Naomi Wolf adds:
The documents, released after long delay in the week between Christmas and New Year, show a nationwide meta-plot unfolding in city after city in an Orwellian world: six American universities are sites where campus police funneled information about students involved with OWS to the FBI, with the administrations’ knowledge (p51); banks sat down with FBI officials to pool information about OWS protesters harvested by private security; plans to crush Occupy events, planned for a month down the road, were made by the FBI – and offered to the representatives of the same organizations that the protests would target; and even threats of the assassination of OWS leaders by sniper fire – by whom? Where? – now remain redacted and undisclosed to those American citizens in danger, contrary to standard FBI practice to inform the person concerned when there is a threat against a political leader (p61).
More details from the PCJ summary:
As early as August 19, 2011, the FBI in New York was meeting with the New York Stock Exchange to discuss the Occupy Wall Street protests that wouldn’t start for another month. By September, prior to the start of the OWS, the FBI was notifying businesses that they might be the focus of an OWS protest…
Documents released show coordination between the FBI, Department of Homeland Security and corporate America. They include a report by the Domestic Security Alliance Council (DSAC), described by the federal government as “a strategic partnership between the FBI, the Department of Homeland Security and the private sector.” The DSAC report shows the nature of secret collaboration between American intelligence agencies and their corporate clients – the document contains a “handling notice” that the information is “meant for use primarily within the corporate security community. Such messages shall not be released in either written or oral form to the media, the general public or other personnel…”….DSAC issued several tips to its corporate clients on “civil unrest” which it defines as ranging from “small, organized rallies to large-scale demonstrations and rioting.”…
The Federal Reserve in Richmond appears to have had personnel surveilling OWS planning. They were in contact with the FBI in Richmond to “pass on information regarding the movement known as occupy Wall Street.” There were repeated communications “to pass on updates of the events and decisions made during the small rallies and the following information received from the Capital Police Intelligence Unit through JTTF (Joint Terrorism Task Force).”…
The Jackson, Mississippi division of the FBI attended a meeting of the Bank Security Group in Biloxi, MS with multiple private banks and the Biloxi Police Department, in which they discussed an announced protest for “National Bad Bank Sit-In-Day” on December 7, 2011.
As a result, many of the perceptions of threats were paranoid. The FBI’s search for Communists in woodpiles Occupiers in midsized and small cities is obvious ovekill. And mind you, this is the same FBI that is nowhere to be found in investigating crisis-related big bank fraud. An individual “leading” Occupy Tampa was tracked when he went to Gainesville. Anchorage, Alaska, Denver, Colorado, Birmingham, Alabama, Jackson, Mississippi, Memphis, Tennessee, and Green Bay, Wisconsin all had Occupy-related briefings and FBI activity.
The rationale for this overkill was that OWS was a terrorist threat. That’s a striking contrast with the media depiction of the movement when it was in its encampment phase as a bunch of directionless hippies with no message. But the FBI response highlights how anything other than corporate or otherwise officially sanctioned assembly is no longer permitted in America. The main objection to OWS really isn’t violence, even though that serves as the excuse for the official crackdown. It was that it would be inconvenient and embarrassing to Important Organizations and People. Now I have to tell you as a resident of New York City, we are subject to inconvenient things on a regular basis. I’d have a lot less reason to take exception to the eviction of OWS if the officialdom was evenhanded about making the city efficient and keeping the streets clear by getting rid of (for starters) all parades, all street fairs, the marathon, and all Presidential visits (well maybe he can make a minimally invasive stop, say by going down the FDR to the UN and staying in those environs).

Wolf draws the ugly conclusion:
Jason Leopold, at, who has sought similar documents for more than a year, reported that the FBI falsely asserted in response to his own FOIA requests that no documents related to its infiltration of Occupy Wall Street existed at all. But the release may be strategic: if you are an Occupy activist and see how your information is being sent to terrorism task forces and fusion centers, not to mention the “longterm plans” of some redacted group to shoot you, this document is quite the deterrent.
There is a new twist: the merger of the private sector, DHS and the FBI means that any of us can become WikiLeaks, a point that Julian Assange was trying to make in explaining the argument behind his recent book. The fusion of the tracking of money and the suppression of dissent means that a huge area of vulnerability in civil society – people’s income streams and financial records – is now firmly in the hands of the banks, which are, in turn, now in the business of tracking your dissent.

Assange has suggested a partial solution: the widespread use of encryption. The problem with using encryption now is that it’s like waving a red flag in front of the NSA and asking them to take interest in you. But if a meaningful percentage of the population, say as many as 3%, were to start using it for most of their communications as part of a large-scale plan, it would throw a wrench into the system. The officialdom would be presented with an unduly large list of parties of interest, most of whom by design would be uninteresting from a threat/intelligence perspective. And if this sort of thing were to take place, anyone who thought they might be objects of interest for the wrong reasons, as in they were members of Occupy, could also take up encrypting their messages for fun and sport.

The peculiar part of this overreaction is it says that banks and government officials see peaceful protests as a threat to their hold on power. It’s odd that they see their position as precarious, unless they have convinced themselves of their vulnerability as an excuse for clamping down even harder on the rest of us.


December 21, 2012

Plan 'C' Anyone? Boehner Humiliated As "Plan B" Lacks Enough Votes To Pass

Update: wow:
Absolute total chaos. ES at lows of the days right now. Luckily, at least the debt ceiling is a firm deadline... Sometime in late March. Oh, and goodbye Boehner?

Market Reaction:

Following the unexpected gavel-out recess from the house, it appears Plan B is a no-go...
Plan 'C' anyone? EURUSD and ES sliding a little more on this news...

December 20, 2012

Quelle Surprise! UBS Gets a Cost-of-Doing-Business Fine for “Epic” Libor Fraud

After the media uproar about HSBC’s deep involvement in the dirtiest sort of money-laundering, UBS’s mere Libor-fixing might look a tad pale. But the notice by the FSA clearly states that it regarded UBS’s conduct as far worse than that of Barclays, where the chairman, CEO, and president all stepped down. Of course, that was mainly because they dared try to shift blame to the Bank of England, claiming they’d gotten tacit approval, and the Bank would have none of it. But the severity of the sanctions against Barclays set a bar that hasn’t been met in subsequent regulatory actions. And Barclays is important because it shows the idea that you can’t go after top executives is a fiction. Barclays soldiers on despite the loss of its three top officers. Clemenceau was right: “The graveyards are full of indispensable men.”

By contrast, Barclays is paying $1.5 billion in fines among three regulators: the FSA, the CFTC, and Finma, a Swiss regulator. The Department of Justice’s Lanny Breuer called the fraud “epic” yet only two staffers are targeted for prosecution: the apparent main actor, trader Mark Hayes, and his colleague Roger Darin, who are charged with mail fraud, price fixing, and conspiracy. Yet the FSA’s notice says that 40 individuals at the bank were involved in Libor manipulation, including 4 senior managers, and another 70 individuals were aware of it.

Bloomberg gives a good overview of the scheme if you don’t have time to read the FSA’s notice. The gaming was so extensive that the FSA noted that “every Libor and Euribor submission in currencies and tenors in which UBS traded is at risk of having been improperly influenced”. “Trader A” would often put in internal orders to manipulate prices for months at a time. The perps also bought the support of players at other firms, via offering profit sharing or other bribes, such as this one:

The FSA notice also confirms my pet theory that internal reviews are useless:

The FSA presents this review straight up when it’s hard to take it at face value. It’s hard to imagine that the legal department did not understand the conflicted role of Trader E and thus knew full well what sort of analysis he would gin up. Even though UBS implemented new procedures in 2008 and 2009, these appear to have been about as effective as corporate mission statements, due both to deficiencies in design and implementation. The directives were above all drafted to dampen down negative press (the Wall Street Journal had taken notice); managers who had been involved in the previous manipulation were involved in oversight; and the internal audit group did a mere “walk through” exercise.

This isn’t surprising if you understand the collusive relationship that has developed between front line staff and management in investment banking and trading businesses. As we wrote in ECONNED:
In the financial services industry version of looting, we instead have firms where operational authority is decentralized, vested in senior business managers, or “producers.” Because of industry evolution and perceived competitive pressures, these producers, as a result of formal incentives plus values held widely within the industry, focused solely on capturing the maximum amount possible in the current bonus period. The formal and informal rewards system thus tallies exactly with the topsy-turvy scheme of “maximizing current extractable value.”

In the past this behavior was positive, indeed highly productive, as long as it was contained and channeled via tough-minded oversight, meaning top management who could properly supervise the business. The main mechanisms are management reporting systems, risk management, and personal understanding of and involvement in day-to-day operations, plus external checks, such as regulations and criminal penalties. For a host of reasons, the balance of power has shifted entirely toward the forces that encourage looting. And because the damage that results cannot clearly be pinned on the top brass (like [the head of AIG's Financial Products unit Joe] Cerullo, they have thin but plausible deniability), it is difficult to ascertain from the outside whether the executives merely unwittingly enabled this process or were active perpetrators.
It turns out that even with extensive examinations, it’s hard to find smoking guns to pin bad activity on top level managers. Remember, the nitty gritty falls to lower-level (although often handsomely paid) professional who communicate with sufficient frequency that it’s possible to find e-mail footprints. And to the extent any of this ground was covered in meetings, PowerPoint only gives the high points; it’s far from a complete record. Senior managers tend to be recipients rather than generators of information, and much of what they convey is verbal: reactions when people come to their desk or office, comments on more formal presentation. And by the time Libor manipulation became an official concern, they’s be sure to be particularly circumspect in any written remarks.
Based on the FSA notice, Felix Salmon is finally convinced of the widespread nature of bank abuses:
Other fines, for other banks, are sure to follow this one — but if Barclays was dreadful and UBS was much worse than Barclays, it’s hard to imagine that anybody has clean hands here. You want to know why pretty much the entire financial sector is still trading at less than book value? This is why: the number of investors who trust the banks is now zero, and banking seems to have become a game of picking up fraudulent nickels in front of a relentless justice-department steamroller. (And for good measure there are all the civil suits as well: the $1.5 billion that UBS is paying today is just a down-payment on the all-in cost of its Libor fraud.)
Felix suggests that UBS has taken the most radical action possible, by pretty much abandoning the fixed income business. Note this appears to have been the result of greatly higher capital requirements in Switzerland. But the Libor scandal may have played a role, since the fixed income operations were the one business unit of four that were led by former UBS managers after the UBS-Swiss Bank merger (even though the UBS name survived, Swiss Bank was actually the dominant player in the deal). The near-closure of the fixed income operations has the former SBC units as the final survivors of that merger.

Bear in mind that this is not the end of the financial toll for UBS. The regulatory orders and notices will facilitate private suits. But that is not at all the same as having the individuals who were ultimately responsible face meaningful consequences.

What Felix depicts correctly as an aggressive measure is still on the wrong axis. So far, the top echelon of UBS is unaffected by this epic scandal. Until we see executives suffer (and fines are insufficient if they reamin wealthy), it’s a no-brainer that this type of behavior will continue, albeit in different businesses and new guises.


December 19, 2012

The Most Critical 48 Hours In The Fiscal Cliff Melodrama Have Begun

There is now about 48 hours until the rubber hits the road. What happens in the next 2 days: in a somewhat surprising development earlier, the Republicans today managed to turn the tables on the president, and as reported this morning, proposed an alternative "Plan B", one which the president has already said he will not to accept as it extends the current Bush tax cuts on all those making $1 million or less (and thus not nearly punitive enough in the eyes of Obama's electorate). The reason for this strawman is that unless Obama settles on some compromise definition of 'wealthy' between his already adjusted definition which moved from $250,000 to $400,000 earlier, and the $1 million cutoff proposed by the republicans, republicans will take the Plan B proposal to the House on Thursday and pass it, only so it is immediately voted down by the Senate, but have the popular backstop of saying "they gave it their best" just as Ken Langone suggested to Rand Paul earlier today on CNBC. And as Reuters reported, it appears that the drop dead date for House majority leader Cantor is Thursday, at which point he will vote, and pass, Plan B. At that point the Fiscal Cliff debate for 2012 is as good as over, as the resulting animosity that develops in the subsequent days will guarantee no further compromises are achievable for the balance of the year.

In other words, tomorrow is when all the horse trading will culminate: if there is no resolution by the end of day, the Thursday Plan B vote is all but assured, as is the resultant Risk Off phase, especially for all those who saw in today's moves yet another glimmer of a compromise when in reality it was all merely the latest and greatest big PR stunt. In the meantime, trigger happy algos will send stocks moving wildly in eiuther direction based on headlines over the next 24 hours, although the consensus is that following the massive overbought surge in stocks in the past month, that a fiscal deal is now largely priced in, and a sell the news event is likely to result following a firm agreement... assuming one comes of course.

From Reuters:
After important concessions in recent days from both President Barack Obama and House of Representatives Speaker John Boehner, Republicans moved to increase pressure on the Democrats by vowing to vote in the House on a "Plan B" back-up measure that would largely disregard the progress made so far.

The Republican proposal was part of a political dance by both parties to try to spin the "fiscal cliff" narrative in their favor even as they edged closer together. The White House rejected the offer but remained confident of an agreement.

"The president has demonstrated an obvious willingness to compromise and move more than halfway toward the Republicans," White House spokesman Jay Carney told reporters, adding that Obama is making a "good faith" effort to reach a compromise.

House Republicans were still meeting to discuss the matter on Tuesday evening.
Why did the market surge today? Because it shared the same view as this espoused by Republican Tom Cole:
"They've still got a long way to go, but you can't help but say that the odds are better today than they were on Friday that we'll get some sort of agreement," said Republican Representative Tom Cole.
Maybe. Maybe not. Based on some preliminary reports, numerous conservatives in the House are still fuming over the concessions already granted by Boehner. As National Journal explains:
A second aim of Boehner’s Plan B strategy is clearly directed internally—at grousing House Republicans. He is telling members of his conference who are restive that he will cave more significantly on taxes now that it is as much on their shoulders as his--because they can cut bait on his negotiations or wait them out. He’s not going to take all the heat for any eventual deal they don’t like.

One senior House Republican aide said that some members have been saying they've had it with the private negotiations between Boehner and the White House, including some who believe these talks should be held in an open conference. What Boehner is now offering, the Republican aide said, is, “We can do something else, if you want.”
A just as big problem is whether a schism will develop in the Democrat party, many of whom see no reason to budge on the $250,000 definition, especially in the aftermath of Obama's trouncing victory.
Obama could face unrest from fellow Democrats. Liberals were likely to oppose a key compromise he has offered to permit shrinking cost-of-living increases for all but the most vulnerable beneficiaries of the Social Security retirement program. His proposal calls for using a different formula, known as "chained Consumer Price Index," to determine the regular cost-of-living increases, essentially reducing benefits.

"I am committed to standing against any benefit cuts to programs Americans rely on, and tying Social Security benefits to chained CPI is a benefit cut," Democratic Representative Keith Ellison said in a statement.

Obama also moved closer to Boehner on the proportion of a 10-year deficit reduction package that should come from increased revenue, as opposed to cuts in government spending. Obama is now willing to accept a revenue figure of $1.2 trillion, down from his previous $1.4 trillion proposal.

Boehner's latest proposal calls for $1 trillion in new tax revenue from higher tax rates and the curbing of some tax deductions taken by high-income Americans.
No matter the final resolution, it appears that the payroll tax cut holiday is over starting January 1, which as reported previously alone will have an rather adverse impact on Q1 GDP. In fact, with all carryovers, even assuming a compromise is reached in the next 48 hours, the hit to GDP in 2013 will be about 0.5%-1.5%. But at least the economists will have something to blame yet another economic miss on, for an economy whose quarterly scorecard is starting to be pockmarked with one-time charges, and "non-recurring" fees to the same extent as Alcoa.

So keep a very close eye on tomorrow's news flow: the next 24 hours is when any hints of a final compromise will have to come. If there are none, bring a helmet.


December 18, 2012

The Bank For International Settlements: Beware a Crash

Equity and fixed income prices have reached unusually high levels that don't reflect the current weakening in the global economy, according to the Bank of International Settlements, leading to concerns of a fresh credit bubble. Further quantitative easing (QE) by the major central banks appears to have encouraged investors to take on more risk to find higher yields, according to the BIS, and sales of riskier types of bonds have increased in the last three months. "Some asset prices started to appear highly valued in historical terms relative to indicators of their riskiness," it said in its quarterly review. "Market participants attributed a significant part of the rally in asset prices to further loosening by central banks, notably the Federal Reserve." – CNBC

Dominant Social Theme: We don't know how things got this far but we warned you.

Free-Market Analysis: Here's another example of how elite dominant social themes work. Often, these fear-based promotions are reinforced by reality.

In other words, if you want to explain to people that food-scarcity demands United Nations involvement in food production, you first actually have to create the scarcity.

The problem with some elite promotions – designed to frighten people into giving up wealth and power to specially prepared globalist solutions – is that they are hard to translate into action. Global warming is a good example of such a meme.

There likely isn't any global warming, or not comprehensively. Thus, the elites that want to promote the theme of global warming (now suddenly called climate change) are faced with the overwhelming challenge of creating something out of nothing.

This leads to bad science and cognitive dissonance where facts have to be made up to fit the plot. And in this era of Internet Information, making up statistics to support a pre-fabricated promotion is a risky business.

The global warming theme blew up several years ago when emails were posted online that revealed what we have suggested ... that by planting only a handful of individuals at strategic choke points affecting world affairs, the top elites can effectively control the larger conversation and influence events as they choose.

Unlike such ambitious promotions as global warming, economic affairs are more easily influenced, as the current economy is not just man-made but created in an unstable way.

The power elite have created a seamless network of something like 150 central banks around the world that pump out fiat money in excess of what economies need. When times are going well, central banks print to fuel the boom. When times are bad, central banks print to ameliorate the bust. But central banks almost always print.

By printing, central banks create terrible bubbles. And this is what has happened yet again. Stocks markets have inflated around the world and the US stock market has expanded a great deal as a result of what is euphemistically known as "easing."

Easing is just more money printing and now the central bank supervising authority, the BIS, is calling attention to the bubble that its own facilities have created.

This is a purely cynical exercise. Central banks cannot know how much money is too much and inevitably they print more of it than is needed. The BIS is now warning us that too much money is available and circulating. Here's some more from the article:

The Fed announced on September 13 that it will buy $40 billion of mortgage-backed securities per month in an attempt to incubate a housing market showing flickering signs of recovery. Chairman Bernanke stipulated that the purchases be open-ended, meaning they will continue until the Fed is satisfied that economic conditions, primarily in unemployment, improve.

Similar measures have been used recently by the European Central Bank, the Bank of Japan and the Bank of England. The BIS warned that corporate bonds were near their pre-crisis levels but with default rates higher than they were in 2007.

"Numerous bond investors said that they felt less well compensated for risk than in the past, but that they had little alternative with rates on many bank deposits close to zero and the supply of other low-risk investments in decline," it said.

The Bank for International Settlements - noted to have predicted the financial crash back in 2006 - said that investment grade, sub-investment grade and emerging market bonds had fallen to their lowest levels since 2008. And mortgage bonds had reached their lowest level ever.

The International Monetary Fund trimmed its 2012 and 2013 global growth forecasts back in October. It now expects the world economy to grow 3.3 percent this year, down from the 3.5 percent growth it predicted in July. And projected growth for next year fell to 3.6 percent, down from 3.9 percent.

Despite this change in forecast the BIS say it hasn't caused a risk-on environment and the price of risky assets has risen in the three months to early December.

The BIS's cynical rhetoric, from our point of view, in issuing such statements is probably a precursor to more economic mayhem. This is one of the benefits of following the development of elite dominant social themes. You can anticipate the inevitably man-made disasters.

We also call these kinds of developments "directed history." By creating stock and bond bubbles – demand for paper instruments with no identifiable, specific, intrinsic value – the top elites are constantly in a position to trigger recessions and depressions over time, virtually on demand.

As a result of central bank money printing, gold and silver have maintained value amidst a blizzard of paper money devaluations. These events have also pushed up demand for paper products inevitably and dramatically.

Both stock and bond markets are being priced beyond what the risk/reward calculation warrants, according to the BIS. Hey, thanks for telling us, guys.

Last we knew, the BIS sat at the top of the central banking hierarchy. Couldn't it have done something sooner? Why is the BIS issuing such a warning now?

The tiresome thing about these warnings is that they merely confirm strategies that have been in place for years. Easing has been aggressively pursued because Ben Bernanke is theoretically in favor of it. Thus, easing has spread around the world.

This is more directed history, in our view. We had lots of questions long ago about the Great Depression and how it took place. But we've watched the current manipulations and it's increasingly evident to us that recent economic chaos is planned. "They" want it that way.

If there are violent crashes in the stock and bond markets, we'll have to live through another spate of breast-beating. And then, of course, we believe the media will rev up what is being prepared in Washington, DC, a special neo-Pecora hearing to do to the capital-raising mechanism of the US what the 1930s regulatory disaster failed to accomplish – sink the remaining financial markets by placing them firmly under the thumb of bureaucrats and technocrats.

Conclusion: It will seem eminently logical ... cause and effect. But it will not be. It can be argued that it will be the further takedown of the world economy by a ruthless elite that is pursuing world government and control via any means necessary.


December 17, 2012

Ian Fraser: HSBC’s $1.9 Billion Settlement Sets (Another) Dangerous Precedent

Yves here. One of the things that has too often gone missing in the many discussions of why massive scale money launderer HSBC was not prosecuted is the basis of the “doing that would be destabilizing” excuse. When a company is indicted (mind you, indicted, not convicted), pretty much all Federal and many (most?) state agencies are required to stop doing business with it, immediately. The effect of the loss of so much business, particularly for a large financial firm, is seen as a death knell.

Of course, that’s the point. The threat of indictment of the company provides tremendous leverage to go after individuals. The Wall Street Journal’s editorial page went on a rampage against Eliot Spitzer when he used that cudgel to force the resignation of CEO Hank Greenberg. Now of course there is a different way to use this power. A prosecutor could just as well inform a board that it is ready to indict the company unless it secures the full cooperation of executives in order to secure prosecutions of all individuals involved in a meaningful fashion, top to bottom. That includes waving the company’s attorney-client privilege on this matter. Sending executives to prison has far more deterrent value that bringing a company down, since many will argue that employees who had nothing to do with the criminal activity would also be harmed.

By Ian Fraser, a financial journalist who blogs at his web site and at qfinance. His Twitter is @ian_fraser.

The ‘settlements’ that London-headquartered banks HSBC and Standard Chartered have reached with the US authorities over serious criminal offences — including sanctions-busting and aiding and abetting terrorism and the global drug trade — are a travesty of justice. Even The Economist, a publication of which I am not usually fan, had a go at the ‘settlements’ saying:
The agreements put an end to uncertainty over the banks’ ability to operate within America, a key link in their global networks; their share prices both rose on the day the fines were announced. And the penalties are, in effect, levied on shareholders; not one corporate employee faces charges (although HSBC, at least, has clawed back payments to those responsible). Indeed, at a news conference this week Lanny Breuer, head of the Justice Department’s criminal division, suggested that an outright prosecution of HSBC was considered and rejected because of how damaging the impact could be on the bank’s viability, and thus on jobs and the American economy. Has a handful of banks become not too big to fail, but too big to jail?
Andrew Bailey, chief executive-designate of the Prudential Regulatory Authority, seems to believe they have. Bailey told the Telegraph’s Harry Wilson that some banks had grown too large to prosecute.
It would be a very destabilising issue. It’s another version of too important to fail. Because of the confidence issue with banks, a major criminal indictment, which we haven’t seen and I’m not saying we are going to see… this is not an ordinary criminal indictment.
So let’s get this straight. In Bailey’s universe protecting a bit of money is more important than the rule of law? Large banks and their senior executives must have an immunity from criminal prosecution — i.e. carte blanche to do whatever they want, including plundering the real economies, forming price-fixing cartels, rigging rates and markets, ransacking communities and funding terrorism, irrespective of the harm caused to others — for fear of upsetting financial stability? I am afraid this won’t wash.

If Bailey really believes it, he is unfit for regulatory office and should be forced out of his job. Writing on AlterNet Lynn Stuart Parramore said:
Senator Carl Levin, chairman of the U.S. Senate Permanent Subcommittee on Investigations, a congressional watchdog panel, observed that “the culture at HSBC was pervasively polluted for a long time.” Now we can be certain it will remain so. Criminal activity has been legitimized. In the world of banking, crime pays, big-time.
Anyone with half a brain must realise that such a stance is unsustainable in the long term. If it were allowed to persist, there’s zero chance of trust being rebuilt in the financial system. Without wishing to sound alarmist it could lead to anarchy and even civil war. After all, why should anyone else bother to obey the law if banks don’t have to? What is the point of having laws? What is the point of having regulators? The state would lose all legitimacy.

Here is what the Rolling Stone journalist Matt Taibbi said about the deals UK banks Standard Chartered and HSBC have pulled off with the US Department of Justice (introducing the clip):
Had pleasure of appearing on Eliot Spitzer’s Viewpoint last night to talk about the hideous Eric Holder/Lanny Breuer HSBC settlement, in which the government elected not to push criminal prosecutions against bank officers who admitted to laundering billions of dollars in drug money. Spitzer was the first guy I thought of when I saw the softball settlement, so it was cool to hear the prosecutorial take on the deal. When I came home after the show, my wife laughed. “It’s like you guys were fighting over who was more pissed off,” she said.

December 14, 2012

We Are Witnessing The Death Of Small Business In America

Historically, small businesses have been the primary engine of new job creation in the United States. If the economy was getting healthy, we would expect to see the number of jobs at new businesses rise. Instead, we are witnessing just the opposite. We are told that the economy is supposed to be "recovering", but the number of "startup jobs" at new businesses has fallen for five years in a row. According to an analysis of U.S. Department of Labor data performed by economist Tim Kane, there were almost 12 startup jobs per 1000 Americans back in the year 2006. By 2011, that figure had fallen to less than 8 startup jobs per 1000 Americans. According to Kane, the number of jobs in the United States at businesses that are less than one year old has fallen from 4.1 million in 1994 to 2.5 million in 2010. Overall, the number of "new entrepreneurs and business owners" has fallen by more than 50 percent as a percentage of the population since 1977. The United States was once known as "the land of opportunity", but now that is fundamentally changing. At this point we truly do have a "crisis of entrepreneurship" in this country, and that is a huge reason why America is in decline. We are witnessing the slow death of the small business in America, and that is incredibly bad news for all of us.
Unfortunately, the problems that small businesses are experiencing right now have been building up for decades. The economic environment for small businesses in America has become incredibly toxic. Sadly, we can see this in the numbers. According to Kane, the following is how the decline in the number of startup jobs per 1000 Americans breaks down by presidential administration...

Bush Sr.: 11.3

Clinton: 11.2

Bush Jr.: 10.8

Obama: 7.8

Obviously, we are headed very much in the wrong direction. Kane speculates about why this may be happening in his paper...

There is anecdotal evidence that the U.S. policy environment has become inadvertently hostile to entrepreneurial employment. At the federal level, high taxes and higher uncertainty about taxes are undoubtedly inhibiting entrepreneurship, but to what degree is unknown. The dominant factor may be new regulations on labor. The passage of the Affordable Care Act is creating a sweeping alteration of the regulatory environment that directly changes how employers engage their workforces, and it will be some time until those changes are understood by employers or scholars. Separately, there has been a federal crackdown since 2009 by the Internal Revenue Service on U.S. employers that hire U.S. workers as independent contractors rather than employees, raising the question of mandatory benefits. New firms tend to use part-time and contract staffing rather than full-time employees during the startup stage. According to Labor Department data, the typical American today only takes home 70 percent of compensation as pay, while the rest is absorbed by the spiraling cost of benefits (e.g., health insurance). The dilemma for U.S. policy is that an American entrepreneur has zero tax or regulatory burden when hiring a consultant/contractor who resides abroad. But that same employer is subject to paperwork, taxation, and possible IRS harassment if employing U.S.-based contractors. Finally, there has been a steady barrier erected to entrepreneurs at the local policy level. Brink Lindsey points out in his book Human Capitalism that the rise of occupational licensing is destroying startup opportunities for poor and middle class Americans.

Kane raises some very good points in his analysis. Without a doubt, small businesses in the United States are being taxed into oblivion. If you doubt this, just read this article.

And the regulatory environment for small businesses is more suffocating than it has ever been before. Unfortunately, our politicians never seem to learn that lesson. During his first term, Obama piled on mountains of new regulations, and now that he has won a second term he is preparing to unleash another massive wave of new regulations.

But many times the worst offenders are politicians on the state and local level. There are some areas of the country (such as California) that have created absolutely nightmarish conditions for small businesses. California had the worst "small business failure rate" in the country in 2010. It was 69 percent higher than the national average. And in 2011, the state of California ranked 50th out of all 50 states in new business creation.

Yet the politicians in California just continue to pile on even more regulations and even more taxes.

Sadly, this kind of thing is happening from coast to coast and it is killing off hordes of small businesses. Just consider the following statistics...

-According to the U.S. Census Bureau, the U.S. economy lost more than 220,000 small businesses during the last recession.

-As a share of the population, the percentage of Americans that are self-employed fell by more than 20 percent between 1991 and 2010.

-As a share of the population, the percentage of "new entrepreneurs and business owners" dropped by a staggering 53 percent between 1977 and 2010.

-The average pay for self-employed Americans declined by $3,721 between 2006 and 2010.

So what needs to be done?

Well, first of all, the tax burden and the regulatory burden on small businesses both need to be greatly reduced.

Secondly, the balance of power in our nation needs to be dramatically shifted. Conservatives run around talking about the need to reduce the power of government and liberals run around talking about the need to reduce the power of corporations, and actually both of them are right.

Our founding fathers intended to establish a Republic where power would never be concentrated in the hands of just a few. That is why they tried to strictly limit the power of the federal government in the U.S. Constitution, and that is why they greatly restricted the size and scope of corporations in early America. For much more on this, please see this article: "Corporatism Is Not Capitalism: 7 Things About The Monolithic Predator Corporations That Dominate Our Economy That Every American Should Know".

Our founding fathers wanted to empower individual citizens and small businesses. They never intended for us to have a system where big government and big corporations dominate everything and crush the "little guy" at every opportunity.

Even as we witness the death of the small business in America, corporations are absolutely thriving. The following chart shows how corporate profits after tax have exploded to new record highs in recent years...

So has this been good for workers? No, it has not translated into more jobs and higher wages. In fact, wages and salaries as a percentage of GDP are now at an all-time low...

That is why it is imperative that we change "the rules of the game" so that the balance of power is shifted back in the direction of individual citizens and small businesses. We desperately need to turn back to the principles that this nation was founded upon.

If nothing is done, these trends are going to get even worse. Barack Obama certainly has no plans to reduce the size and the power of the government. Since he was elected, an average of 101 new federal employees have been added to the government payroll every single day...
In the 1,420 days since he took the oath of office, the federal government has daily hired on average 101 new employees. Every day. Seven days a week. All 202 weeks. That makes 143,000 more federal workers than when Obama talked forever on that cold day in January of 2009.
And if nothing is done, the monolithic predator corporations that dominate our economy will just get even larger and even more powerful. Meanwhile, hundreds of thousands more small businesses will close up shop all over the country.

Unfortunately, most Americans seem totally apathetic about these issues. They seem content to wear "meggings", watch "Honey Boo Boo" on television and let our government and corporate overlords run everything. Most of them have even been brainwashed into believing that this is the American way of doing things.

So where do we go from here?

Well, this nation will probably continue to keep doing the same things that it has been doing, and it will continue to get the same results.

The death of small business in America is happening right in front of our eyes, and everybody can see it happening, but very few people are doing anything to stop it.


December 13, 2012

Two-Track Corporate Justice Is Not the American Way

HSBC to Pay $1.92 Billion to Settle Charges of Money Laundering ... State and federal authorities decided against indicting HSBC in a money-laundering case over concerns that criminal charges could jeopardize one of the world's largest banks and ultimately destabilize the global financial system. Instead, HSBC announced on Tuesday that it had agreed to a record $1.92 billion settlement with authorities. The bank, which is based in Britain, faces accusations that it transferred billions of dollars for nations like Iran and enabled Mexican drug cartels to move money illegally through its American subsidiaries. While the settlement with HSBC is a major victory for the government, the case raises questions about whether certain financial institutions, having grown so large and interconnected, are too big to indict. Four years after the failure of Lehman Brothers nearly toppled the financial system, regulators are still wary that a single institution could undermine the recovery of the industry and the economy. But the threat of criminal prosecution acts as a powerful deterrent. If authorities signal such actions are remote for big banks, the threat could lose its sting. Behind the scenes, authorities debated for months the advantages and perils of a criminal indictment against HSBC. – New York Times

Dominant Social Theme: The crooks are caught.

Free-Market Analysis: The bottom line here is that the crooks are NOT caught. Bear in mind as a libertarian paper, we don't buy into any of these pseudo crimes. Money laundering, drug buying, regulatory transgressions ... none of these have anything to do with natural law.

They are all made-up crimes. Nonetheless, they show us the larger sickness of modern-day Western society. Average citizens are imprisoned for decades for the "crimes" that those who work in corporations perform without serious personal consequences.

Were we to observe this behavior in ancient times we would be well aware of just how immoral it really is. If we studied ancient examples of large organizations, favored by the emperor, that avoided criminal consequences, we would easily see the favoritism and unfairness.

If we read that such organizations were exempt from policing because their very size made them a threat to the social order, we would likely scoff. We would surmise that such an attitude was merely a justification for inaction.

But let the same thing happen today and many take it at face value. Again, we are not advocating civil or criminal penalties for any of these "crimes" ... but the disparity between the ruined lives of individuals and the non-consequences of the same actions within a corporate environment is startling. Here's some more from the article:

Some prosecutors at the Justice Department's criminal division and the Manhattan district attorney's office wanted the bank to plead guilty to violations of the federal Bank Secrecy Act, according to the officials with direct knowledge of the matter, who spoke on the condition of anonymity. The law requires financial institutions to report any cash transaction of $10,000 or more and to bring any dubious activity to the attention of regulators.

Jonathan Bachman/ReutersIn 2010, Lanny A. Breuer, left, head of the Justice Department's criminal division, created a task force on money laundering.

Given the extent of the evidence against HSBC, some prosecutors saw the charge as a healthy compromise between a settlement and a harsher money-laundering indictment. While the charge would most likely tarnish the bank's reputation, some officials argued that it would not set off a series of devastating consequences.

A money-laundering indictment, or a guilty plea over such charges, would essentially be a death sentence for the bank. Such actions could cut off the bank from certain investors like pension funds and ultimately cost it its charter to operate in the United States, officials said.

... After months of discussions, prosecutors decided against a criminal indictment, but only after securing record penalties and wide-ranging sanctions.

The HSBC deal includes a deferred prosecution agreement with the Manhattan district attorney's office and the Justice Department. The deferred prosecution agreement, a notch below a criminal indictment, requires the bank to forfeit more than $1.2 billion and pay about $700 million in fines, according to the officials briefed on the matter. The case, officials say, will claim violations of the Bank Secrecy Act and Trading with the Enemy Act.

The charges sound grave, indeed. Without granting any of them credibility (what "enemy" does the US have, after all?), we can certainly say in good faith that an individual facing the same laundry list of transgressions would likely have ended up incarcerated.

As far as destabilizing the system goes, we're all for it. The system SHOULD be destabilized. The too-big-to-fail banks should be allowed to fail.

Strictly from a judicial standpoint, the idea of not prosecuting certain people because they work for large entities is a terrifically corrosive one. There is basically a formal two-track system of justice in the US now, and that simply cannot be good for civil comity.

The CIA is said to make a lot of money via drug dealing. This is probably one of the REAL reasons that such cases are not prosecuted.

Any way you examine it, most of these white-collar laws were only recently enacted and ought to be done away with. And then the too-big-to-fail banks ought to be un-propped. Let them tumble at will.

Conclusion: If the system itself falls down, we'll build a better one.


December 12, 2012

HSBC to Pay $1.9 Billion Fine for Money Laundering

It seems the Federal Government has finally woken up and is making a show of being serious about one type of bank misbehavior, that of money laundering. The striking element about the agreement with various Federal agencies and the Department of Justice is that nearly $1.3 billion of the $1.9 billion fine comes in the form of a deferred prosecution agreement. This is the criminal analogy to injunctive relief, in which a miscreant is granted amnesty in return for committing to change its behavior in specific ways. The charges are then dismissed if the subject follows through. On paper, this is a much tougher regime than the frequently violated injunctive relief, since the charges remain over the head of the miscreant until they are dismissed. The open question in these cases is whether the monitoring of compliance is serious or pro-forma, and that’s impossible to know from the outside.

The grounds for the criminal part appear to be money laundering for Iran. So why did HSBC get the book thrown at them when Standard Chartered was laundering the Iranian government’s biggest source of foreign exchange, its oil revenues, on behalf of the central bank, and Treasury and other Federal regulators, was a mere $330 million when New York State got $340 million? Admittedly, there is one difference: here, US regulators had already told the bank to shape up and it failed to do so.

From the Wall Street Journal:
U.S. authorities are preparing to announce as early as Tuesday a record $1.9 billion settlement with HSBC Holdings HSBA.LN -0.37% PLC to settle allegations the bank for years ignored red flags about money laundering….
HSBC’s troubles with lax financial controls first surfaced publicly in 2010 when the Office of the Comptroller of the Currency issued a cease-and-desist order citing “deficiencies with respect to suspicious activity reporting, monitoring of bulk cash purchases and international funds transfers, customer due diligence concerning its foreign affiliates, and risk assessment with respect to politically-exposed persons and their associates.”


December 11, 2012

15 Signs That The Economy Is Rapidly Getting Worse As We Head Into 2013

How can the mainstream media claim that the U.S. economy is "improving" when it is painfully obvious to anyone with a brain that the middle class is being absolutely eviscerated? According to numbers that were just released, the number of Americans on food stamps rose by more than 600,000 in a single month to an all-time record high of 47.7 million. Youth unemployment in the U.S. is at a post-World War II high and large companies have announced the elimination of more than 100,000 jobs since Barack Obama won the election. Consumer debt just hit a new record high and the federal government is accumulating debt at a much faster pace than it was at this time last year. So where is the evidence that the economy is getting better? The mainstream media says that the decline of the unemployment rate to "7.7 percent" is evidence that things are improving, but I showed how fraudulent that number is yesterday. The percentage of working age Americans with a job today is exactly where it was back in September 2009 in the midst of the last major economic crisis. The mainstream media is desperate for any shred of evidence that it can use to make people feel good and show that the Obama administration has our economy on the right track, and so they jump on any number that even looks remotely promising and they ignore mountains of evidence to the contrary. They don't seem to care that poverty is absolutely exploding and that the number of Americans on food stamps has risen by nearly 50 percent while Obama has been in the White House. They don't seem to care that the U.S. share of global GDP has fallen from 31.8 percent in 2001 to 21.6 percent in 2011. They don't seem to care that more good paying jobs are being shipped overseas with each passing day. They don't seem to care that formerly great U.S. cities that were once the envy of the entire globe are now crime-infested hellholes. All they seem to care about is putting out news that makes people feel warm and fuzzy and making sure that Obama looks good. Unfortunately, the truth is that the U.S. economy is steadily getting worse, and 2013 is not looking very promising at all right now. Hopefully at some point the mainstream media will take a break from coverage of the royal pregnancy and the latest celebrity scandals to report on the real problems that we are facing right now.

The following are 15 signs that the economy is rapidly getting worse as we head into 2013...

#1 According to numbers that were just released, the number of Americans on food stamps has risen to a new all-time record of 47.71 million. That is a huge increase of more than 600,000 over the previous reading of 47.10 million. After about a year of slow growth, it looks like the number of Americans on food stamps is starting to skyrocket once again. Back in the 1970s, about one out of every 50 Americans was on food stamps. Today, about one out of every 6.5 Americans is on food stamps.

#2 Youth unemployment in the United States is now at the highest level that we have seen since World War II.

#3 According to Gallup, unemployment in the United States shot up very sharply during the month of November.

#4 It looks like the unemployment numbers are likely to get even worse. Since the election, dozens of large companies have announced major layoffs. Overall, large companies have announced the elimination of more than 100,000 jobs since November 6th.

#5 According to the Wall Street Journal, of the 40 biggest publicly traded corporate spenders, half of them plan to reduce capital expenditures over the coming months.

#6 Small business owners all over America are declaring that Obamacare is going to force them to start replacing full-time workers with part-time workers during 2013.

#7 One recent survey discovered that 40 percent of all Americans have $500 or less in savings.

#8 A different recent survey found that 28 percent of all Americans do not have a single penny saved for emergencies.

#9 62 percent of middle class Americans say that they have had to reduce household spending over the past year.

#10 Many Americans are trying to make ends meet for their families by going into more debt. Consumer borrowing hit another brand new record high in October. It looks like the American people have not learned from their past mistakes and have decided to roll up consumer debt at a faster pace than ever before.

#11 Median household income in America has fallen for four consecutive years. Overall, it has declined by over $4000 during that time span.

#12 Wall Street bankers are expecting "the worst bonus season" since 2008. Not a lot of people are going to shed tears over this one, but this is a sign that there is trouble in the financial world.

#13 Food banks all over America are reporting that more needy families than ever before are showing up to get food.

#14 As I wrote about yesterday, the federal government has run a deficit of $292 billion dollars during the first two months of fiscal 2013. That figure is $57 billion higher than it was during the same period last year. Government debt continues to soar wildly out of control and at some point all of that debt is absolutely going to crush us.

#15 I have written previously about how the once great city of Detroit has become a symbol of the downfall of the U.S. economy. Well, now the state of Michigan is laying the groundwork for a "managed bankruptcy" of Detroit. Sadly, many other large U.S. cities will likely follow suit over the next couple of years.

We should truly mourn for what is happening to Detroit. At one time, it was one of the most beautiful cities on earth. But now it is on the cutting edge of America's economic decline. You can see some amazing before and after pictures of an abandoned Detroit school right here. Sadly, what is happening to Detroit will soon be happening to the rest of the country.

A similar thing is happening over in Europe. Greece is on the cutting edge of Europe's economic decline, and people over there are becoming very desperate. The following is an excerpt from a Financial Post article about how the Greek middle class is turning to crime as the depression in that nation gets even worse...
In the once stable neighborhood of Kordelio, the unemployed and drug users gather in the parks, scaring away mothers and children, and crimes like chain snatching are on the rise. Many long-time residents have left, moving abroad or to their families’ villages, leaving behind empty houses, said Evangelia Rombou, 58, who has lived in Kordelio for 22 years.
But it is not just Greece that is grappling with these kinds of issues. Now even countries that had been thought to be "stable" are experiencing significant problems. For example, a massive crime wave has broken out in France. The crime wave in France is being blamed on "austerity", but the government of France still spends far more than it brings in.

So how bad would things get in France if the French government actually did go to a balanced budget?

And how bad would things get in the United States if the federal government was not stealing more than 100 million dollars an hour from our children and our grandchildren?

Even in the midst of our debt-fueled prosperity we are starting to see glimpses of how desperate people will become when our country is someday forced to live within its means. For example, the following is from a report about an incident that happened in Columbus, Ohio the other day...
Columbus Police sprayed Mace on several people in a crowd that had gathered to sign up for a list to get subsidized housing at a northwest Columbus apartment complex.
Police said the crowd started to gather Friday night for the Saturday morning event at The Heritage apartment complex on Gatewood Road near Sunbury Road in northeast Columbus.

Authorities said that its highest number, the crowd reached 2,000 people.
Our entire economy is a giant mirage. Our prosperity has been purchased by stealing from the future. A few people have been warning that we have completely destroyed our future in the process, but both major political parties just continue to do it and the mainstream media just continues to cheer them on.

At some point this con game will end and this economic mirage will disappear. When that happens, millions of people all over this country are going to become very angry and very desperate.

I hope that you have a plan for what you will do when that happens.

December 10, 2012

Risk and Reward in High Frequency Trading

A paper on the profitability of high frequency traders has been attracting a fair amount of media attention lately. Among the authors is Andrei Kirilenko of the CFTC, whose earlier study of the flash crash used similar data and methods to illuminate the ecology of trading strategies in the S&P 500 E-mini futures market. While the earlier work examined transaction level data for four days in May 2010, the present study looks at the entire month of August 2010. Some of the new findings are startling, but need to be interpreted with greater care than is taken in the paper.

High frequency traders are characterized by large volume, short holding periods, and limited overnight and intraday directional exposure:
For each day there are three categories a potential trader must satisfy to be considered a HFT: (1) Trade more than 10,000 contracts; (2) have an end-of-day inventory position of no more than 2% of the total contracts the firm traded that day; (3) have a maximum variation in inventory scaled by total contracts traded of less than 15%. A firm must meet all three criteria on a given day to be considered engaging in HFT for that day. Furthermore, to be labeled an HFT firm for the purposes of this study, a firm must be labeled as engaging in HFT activity in at least 50% of the days it trades and must trade at least 50% of possible trading days.
Of more than 30,000 accounts in the data, only 31 fit this description. But these firms dominate the market, accounting for 47% of total trading volume and appearing on one or both sides of almost 75% of traded contracts. And they do this with minimal directional exposure: average intraday inventory amounts to just 2% of trading volume, and the overnight inventory of the median HFT firm is precisely zero.

This small set of firms is then further subdivided into categories based on the extent to which they are providers of liquidity. For any given trade, the liquidity taker is the firm that initiates the transaction, by submitting an order that is marketable against one that is resting in the order book. The counterparty to the trade (who previously submitted the resting limit order) is the liquidity provider. Based on this criterion, the authors partition the set of high frequency traders into three subcategories: aggressive, mixed, and passive:
To be considered an Aggressive HFT, a firm must… initiate at least 40% of the trades it enters into, and must do so for at least 50% of the trading days in which it is active. To be considered a Passive HFT a firm must initiate fewer than 20% of the trades it enters into, and must do so for at least 50% of the trading days during which it is active. Those HFTs that meet neither… definition are labeled as Mixed HFTs. There are 10 Aggressive, 11 Mixed, and 10 Passive HFTs.
This heterogeneity among high frequency traders conflicts with the common claim that such firms are generally net providers of liquidity. In fact, the authors find that “some HFTs are almost 100% liquidity takers, and these firms trade the most and are the most profitable.”

Given the richness of their data, the authors are able to compute profitability, risk-exposure, and measures of risk-adjusted performance for all firms. Gross profits are significant on average but show considerable variability across firms and over time. The average HFT makes over $46,000 a day; aggressive firms make more than twice this amount. The standard deviation of profits is five times the mean, and the authors find that “there are a number of trader-days in which they lose money… several HFTs even lose over a million dollars in a single day.”

Despite the volatility in daily profits, the risk-adjusted performance of high frequency traders is found to be spectacular:
HFTs earn above-average gross rates of return for the amount of risk they take. This is true overall and for each type… Overall, the average annualized Sharpe ratio for an HFT is 9.2. Among the subcategories, Aggressive HFTs (8.46) exhibit the lowest risk-return tradeoff, while Passive HFTs do slightly better (8.56) and Mixed HFTs achieve the best performance (10.46)… The distribution is wide, with an inter-quartile range of 2.23 to 13.89 for all HFTs. Nonetheless, even the low end of HFT risk-adjusted performance is seven times higher than the Sharpe ratio of the S&P 500 (0.31).
These are interesting findings, but there is a serious problem with this interpretation of risk-adjusted performance. The authors are observing only a partial portfolio for each firm, and cannot therefore determine the firm’s overall risk exposure. It is extremely likely that these firms are trading simultaneously in many markets, in which case their exposure to risk in one market may be amplified or offset by their exposures elsewhere. The Sharpe ratio is meaningful only when applied to a firm’s entire portfolio, not to any of its individual components. For instance, it is possible to construct a low risk portfolio with a high Sharpe ratio that is composed of several high risk components, each of which has a low Sharpe ratio.

To take an extreme example, if aggressive firms are attempting to exploit arbitrage opportunities between the futures price and the spot price of a fund that tracks the index, then the authors would have significantly overestimated the firm’s risk exposure by looking only at its position in the futures market. Over short intervals, such a strategy would result in losses in one market, offset and exceeded by gains in another. Within each market the firm would appear to have significant risk exposure, even while its aggregate exposure was minimal. Over longer periods, net gains will be more evenly distributed across markets, so the profitability of the strategy can be revealed by looking at just one market. But doing so would provide a very misleading picture of the firms risk exposure, since day-to-day variations in profitability within a single market can be substantial.

The problem is compounded by the fact that there are likely to by systematic differences across firms in the degree to which they are trading in other markets. I suspect that the most aggressive firms are in fact trading across multiple markets in a manner that lowers rather than amplifies their exposure in the market under study. Under such circumstances, the claim that aggressive firms “exhibit the lowest risk-return tradeoff” is without firm foundation.

Despite these problems of interpretation, the paper is extremely valuable because it provides a framework for thinking about the aggregate costs and benefits of high frequency trading. Since contracts in this market are in zero net supply, any profits accruing to one set of traders must come at the expense of others:
From whom do these profits come? In addition to HFTs, we divide the remaining universe of traders in the E-mini market into four categories of traders: Fundamental traders (likely institutional), Non-HFT Market Makers, Small traders (likely retail), and Opportunistic traders… HFTs earn most of their profits from Opportunistic traders, but also earn profits from Fundamental traders, Small traders, and Non-HFT Market Makers. Small traders in particular suffer the highest loss to HFTs on a per contract basis.
Within the class of high frequency traders is another hierarchy: mixed firms lose to aggressive ones, and passive firms lose to both of the other types.

The operational costs incurred by such firms include payments for data feeds, computer systems, co-located servers, exchange fees, and highly specialized personnel. Most of these costs do not scale up in proportion to trading volume. Since the least active firms must have positive net profitability in order to survive, the net returns of the most aggressive traders must therefore be substantial.

In thinking about the aggregate costs and benefits of all this activity, it’s worth bringing to mind Bogle’s law:
It is the iron law of the markets, the undefiable rules of arithmetic: Gross return in the market, less the costs of financial intermediation, equals the net return actually delivered to market participants.
The costs to other market participants of high frequency trading correspond roughly to the gross profitability of this small set of firms. What about the benefits? The two most commonly cited are price discovery and liquidity provision. It appears that the net effect on liquidity of the most aggressive traders is negative even under routine market conditions. Furthermore, even normally passive firms can become liquidity takers under stressed conditions when liquidity is most needed but in vanishing supply.

As far as price discovery is concerned, high frequency trading is based on a strategy of information extraction from market data. This can speed up the response to changes in fundamental information, and maintain price consistency across related assets. But the heavy lifting as far as price discovery is concerned is done by those who feed information to the market about the earnings potential of publicly traded companies. This kind of research cannot (yet) be done algorithmically.

A great deal of trading activity in financial markets is privately profitable but wasteful in the aggregate, since it involves a shuffling of net returns with no discernible effect on production or economic growth. Jack Hirschleifer made this point way back in 1971, when the financial sector was a fraction of its current size. James Tobin reiterated these concerns a decade or so later. David Glasner, who was fortunate enough to have studied with Hirshlefier, has recently described our predicament thus:
Our current overblown financial sector is largely built on people hunting, scrounging, doing whatever they possibly can, to obtain any scrap of useful information — useful, that is for anticipating a price movement that can be traded on. But the net value to society from all the resources expended on that feverish, obsessive, compulsive, all-consuming search for information is close to zero (not exactly zero, but close to zero), because the gains from obtaining slightly better information are mainly obtained at some other trader’s expense. There is a net gain to society from faster adjustment of prices to their equilibrium levels, and there is a gain from the increased market liquidity resulting from increased trading generated by the acquisition of new information. But those gains are second-order compared to gains that merely reflect someone else’s losses. That’s why there is clearly overinvestment — perhaps massive overinvestment — in the mad quest for information.
To this I would add the following: too great a proliferation of information extracting strategies is not only wasteful in the aggregate, it can also result in market instability. Any change in incentives that substantially lengthens holding periods and shifts the composition of trading strategies towards those that transmit rather than extract information could therefore be both stabilizing and growth enhancing.

December 7, 2012

Rising Taxes Part of Elite Global Strategy?

The taxman isn't really after the big beasts ... Small businesses, not the multinationals, will bear the brunt of the Revenue's blitz ... Small businesses will be targeted by Revenue & Customs while global corporations use the law to get around their tax obligations Photo: Alamy ... The taxman cometh. Ever since the first impecunious ruler sent his collectors marauding across the land to exact tribute from a resentful populace, no subject has been better guaranteed to get the blood boiling. Uttered in a thousand languages, the question "Why should I pay?" must be the most often asked in history, ahead even of "Do you love me?" or "What's the time?" Gradually, though, it has been replaced by a new one: "If I'm paying, why isn't he?" – UK Telegraph

Dominant Social Theme: Taxes must be paid in ever-higher amounts.

Free-Market Analysis: Taxes are going up around the world and it's time to offer the possibility that it is deliberate.

Of course it is deliberate in terms of individual countries. Our point is that the tax increases are seemingly being orchestrated as part of a larger policy aimed at reinforcing world government.

The powers-that-be that control central banks and have put in place a world government infrastructure are engaged in a series of moves to bring us closer to the goal of global governance.

Our perception that taxes are being deliberately raised the world over was buttressed lately by a number of articles commenting on this phenomenon.

Here's an excerpt from one such article entitled "No Escape: Taxes Rise Globally," that was posted recently at the Independent Journal Review:

Governments around the world are becoming more and more hostile to the 'makers' as we move into 2013. These days, if you are earning more than $1 million per year, finding any kind of tax shelter is becoming harder to do, especially if you are trying to find a tax haven overseas. In addition, you won't find any breaks being overlooked, especially since the IRS is heavily scrutinizing earnings of all shapes and sizes ...if you've made it, then they want to see it.

The New York Times has a 3-page report, concerning how taxes are going higher around the globe, and scrutiny of earnings is becoming so thorough it's getting scary:

"Taxes on earnings, investment income, sales and a few other things have gone up already in many countries, and further increases are possible, including a huge one in the United States.

"Another source of unease and doubt for taxpayers is a trend toward increases of other sorts: in scrutiny by revenue authorities, reporting requirements for individuals and businesses, and legislation to close tax code loopholes.

"Also, it's not like these rates are being hiked slowly by any measure. No, especially in European countries like France, tax rates on folks earning roughly $1.28 million are seeing a 75% tax rate under President François Hollande ...a move some tax experts say is laughable:

" 'It's perhaps the most foolish set of tax policies under discussion in all of Europe,' said J.D. Foster, a senior fellow at the Heritage Foundation. 'You just have to laugh and ask whether he was elected for the sole purpose of destroying the French Republic. Everyone says they want a growth agenda, then everything they do harms growth.' "

The answer to Mr. Foster's rhetorical question is "yes," the elites trying to create global government ARE likely trying to destroy France, at least in its current incarnation.

Presumably, the chaos now being inflicted on the world will be ameliorated when the powers-that-be step forward to offer the bleeding, starving peoples of the world the ability to be part of a global government that will do away with the chaos of nation-states.

A chaos that has been developed and inflicted by the same elites behind world government! We see this as a definite possibility. After World War I, the League of Nations was developed. After World War II came the United Nations, International Monetary Fund, World Bank, etc.

After chaos ... order. We are not yet in the "chaos" phase but we are getting there.

Unfortunately, as the Telegraph article excerpted at the beginning of this analysis points out, people are not necessarily questioning the idea of raising taxes. In some cases, people are roused to indignation that others, especially large corporations, are not paying "their fair share."

Of course, there is no "fair share." And while we are not advocating tax evasion of any sort, we are well aware that the constant drumroll regarding sovereign debt and the difficulty of Western finances is providing justification for higher taxes.

Here's more from the Telegraph article:

So the news that George Osborne is unleashing HM Revenue & Customs to hunt down the evaders and avoiders will bring some satisfaction to the majority who pay what is owed (mainly because it is taken from source and they have no choice).

But do we seriously believe that Google, Amazon, Starbucks and the other multinationals hounded by anti-capitalist campaigners such as UK Uncut are the real targets for this renewed onslaught? With their corporate tax departments and battalions of accountants, the chances of getting them to cough up when they are not legally required to is remote.

Starbucks has now apparently agreed to change its tax arrangements – but only because its coffee shops were being boycotted by customers. So, instead of the Chancellor spending the promised £154 million extra to bolster HMRC's investigations, it would be cheaper for him to finance a consumer backlash and shame a few more big corporations into paying a fair whack ...

But this new cash is not intended to fund a drive against the multinationals, since they will always be one step ahead of the taxman. It is really about targeting people much lower down the income scale – and doing so in a way that is more MI5 than Inland Revenue, with millions of people having their credit reference agency files secretly checked to identify possible evaders ...

Of course, it is in the public interest that HMRC pursues tax that is lawfully due; but it must use its substantial powers appropriately, otherwise trust in the tax system will decline. At the time of the 2005 merger, concerns were voiced that the "Big Brother" approach of Customs and Excise would prevail; the Chancellor's announcement yesterday seems to confirm its ascendancy.

Most of us will have little to do with HMRC beyond receiving a new PAYE tax coding every April. But for small businesses and the self-employed, it is a force to be reckoned with. It is these people, not the Googles and Amazons, who will get it in the neck as a desperate Treasury makes a rapacious grab for every penny due in tax. There is, needless to say, an alternative: the Government could try spending less.

What a disturbing article. Don't the Brits see what is going on? Tax rates in France are headed toward 75 percent. In the US, local, state and federal taxes are headed over 50 percent for some – and not just the wealthy. (And that doesn't include healthcare.)

Peasants in the Middle Ages were taxed or tithed at around 30 percent. Today's miserable middle class is subject to far higher confiscations. And the taxes are applied all the way through the manufacturing chain, not just at the end of it.

In Britain, anyway, most of the indignation seems to be saved for those the government identifies as not paying all that they "owe." This is a sad evolution and shows the strength of power elite memes. The promotion of scarcity themes and other sorts of propaganda continues to work broadly.

The current tax system is not reasonable on numerous levels. Nation-states, for instance, can print all the money they want via monopoly central banking.

There really is no reason to levy taxes, let alone confiscatory ones. There must be other reasons ...

Conclusion: We think we know.