May 31, 2012

When The Derivatives Market Crashes (And It Will) U.S. Taxpayers Will Be On The Hook

Warren Buffett once said that derivatives are "financial weapons of mass destruction", and that statement is more true today than it ever has been before. Recently, JP Morgan made national headlines when it announced that it was going to take a 2 billion dollar loss from derivatives trades gone bad. Well, it turns out that JP Morgan did not tell us the whole truth. As you will see later in this article, most analysts are estimating that the losses will eventually be far larger than 2 billion dollars. But no matter how bad things get for JP Morgan, it will not be allowed to fail. JP Morgan is the largest bank in the United States, so it is essentially the "granddaddy" of the too big to fail banks. If JP Morgan gets to the point where it is about to collapse, the U.S. government and the Federal Reserve will rush in to save it. Because of this "security blanket", banks such as JP Morgan feel free to take outrageous risks. Today, JP Morgan has more exposure to derivatives than anyone else in the world. If they win, they win big. If they lose, U.S. taxpayers will be on the hook. Not only that, but thanks to Dodd-Frank, U.S. taxpayers are on the hook for bailing out the major derivatives clearinghouses if there is ever a major derivatives crisis. So when the derivatives market crashes (and it will) you and I will be left holding a gigantic bill.

Derivatives almost caused the complete collapse of insurance giant AIG back in 2008. But instead of learning our lessons, the derivatives bubble has gotten even larger since that time.

A Bloomberg article that was published last year contained a great quote from Mark Mobius about derivatives....

Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved.

“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said at the Foreign Correspondents’ Club of Japan in Tokyo today in response to a question about price swings. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”
Never in the history of the world have we ever seen anything like this derivatives bubble.

But instead of getting it under control, we just allowed it to get bigger and bigger and bigger.

Now JP Morgan is in quite a bit of trouble. A recent Daily Finance article summarized how JP Morgan got into this mess....

Bruno Iksil, a trader working in the bank's London office, placed a massive bet in the derivatives market. Derivatives "derive" their value from the value of an underlying asset, like stocks, bonds, currencies, or a market index. The specific type of derivative used in Iksil's bet was a credit default swap index, known as "CDX.NA.IG.9."

CDX.NA.IG.9 tracks a basket of corporate bonds. Iksil's positions on the index were so big (one report put it at $100 billion) that they were moving the market and interfering with other traders' positions. These annoyed traders -- hedge-fund managers -- dubbed Iksil "the London Whale" for his outsize bets.
So if the real number isn't 2 billion dollars, how much will JP Morgan eventually lose?

Morgan Stanley says that the losses could eventually reach 5 billion dollars.

The Independent is reporting that the losses could eventually reach 7 billion dollars.

One author featured on Zero Hedge suggested that the losses could ultimately reach 20 billion dollars....

Simple: because it knew with 100% certainty that if things turn out very, very badly, that the taxpayer, via the Fed, would come to its rescue. Luckily, things turned out only 80% bad. Although it is not over yet: if credit spreads soar, assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20 billion loss when all is said and done. But hey: at least "net" is not "gross" and we know, just know, that the SEC will get involved and make sure something like this never happens again.
The truth is that nobody really knows. Everybody agrees that the losses will likely far exceed 2 billion dollars, but the real extent of the crisis will not be known until the trades play out.

According to the Huffington Post, JP Morgan recently sold 25 billion dollars of profitable securities to raise some cash. The profit on the sale of those securities will be somewhere in the neighborhood of a billion dollars.

A billion dollars will help, but it will not be nearly enough.

Many are interpreting this move as a sign of panic by JP Morgan.

Meanwhile, JP Morgan CEO Jamie Dimon continues to do quite well. In fact, his 23 million dollar pay package was recently approved by shareholders at an annual meeting.

Wouldn't you like to do your job badly and still make 23 million dollars?

Right now, JP Morgan is essentially in a "staring contest" with those on the other side of the derivatives trades that went bad. This "staring contest" was described in a recent CNN article....

It's clear from public data filed with The Depository Trust & Clearing Corporation that JPMorgan Chase hasn't sold any of its positions yet. The DTCC tracks trading activity and sizes of positions on the IG9 and other indexes, and there haven't been any big moves since last week.

"Whatever the size was, it's clearly not something that you can call one or two dealers and sell," said Garth Friesen, a co-chief investment officer at AVM, a derivatives hedge fund that's not involved in these trades.

As soon as it becomes clear that JPMorgan Chase is unwinding its position, it will be obvious to players on every major trading desk. Hedge funds will immediately start piling into that index and buying protection, driving up the bank's losses.

Until then, it won't cost the hedge funds much to sit and wait.
JP Morgan is desperately hoping that the markets move in their favor.

If the markets move against JP Morgan in a big way it could potentially be absolutely catastrophic for the biggest bank in America.

An excerpt from an email that Steve Quayle recently received from an anonymous international banking source contained some chilling analysis of the situation....

The derivative market that JPM plays in is the CDX.NA.IG.9, when factions within their London office (London Whale) made overly leveraged swaps, hedge funds smelled blood and so did a few banks. You see any moves that JPM does here on out exposes their weakness further. Which they can not afford any more exposure thus they are not buying back any more shares which is the equivalent of cutting an artery in a pool full of sharks. The strategy they are taking right now is to sit through the storm and ride it out as they can do nothing else for any action will make them even more vulnerable. They can not absorb hits in both JPM SLV and CDX.NA.IG.9. Inactivity is not something they want to do it is something they have to do. There is no other choice for them.

So what will happen if JP Morgan loses too much money?

Well, it will beg the U.S. government and the Federal Reserve for money and the U.S. government and the Federal Reserve will comply.

There is no way that they are going to let the largest bank in America fail.

In addition, as I mentioned earlier, Dodd-Frank has put U.S. taxpayers on the hook for future bailouts of derivatives clearinghouses. This was detailed in a recent Wall Street Journal article....

Little noticed is that on Tuesday Team Obama took its first formal steps toward putting taxpayers behind Wall Street derivatives trading — not behind banks that might make mistakes in derivatives markets, but behind the trading itself. Yes, the same crew that rails against the dangers of derivatives is quietly positioning these financial instruments directly above the taxpayer safety net.
One of the things that Dodd-Frank does is that it gives the Federal Reserve the power to provide "discount and borrowing privileges" to derivatives clearinghouses in the event of a major derivatives crisis.

This is what our politicians love to do.

They love to have the U.S. taxpayer guarantee everything.

Our politicians look at us as one giant insurance policy.

Apparently they believe that if anything in the financial world goes wrong that U.S. taxpayers should be the ones to clean up the mess.

But will we really have enough money to bail everyone out when the derivatives market crashes?

Today, the 9 largest banks in the United States have a total of more than 200 trillion dollars of exposure to derivatives.

That is approximately 3 times the size of the entire global economy.

The U.S. government is already nearly 16 trillion dollars in debt.

How in the world can we afford to keep bailing out the huge messes that Wall Street makes?

Sadly, most Americans have no idea how vulnerable our financial system really is.

It is a poorly constructed house of cards that could come crashing down at any time.

If you still have faith in our financial system you are being quite foolish and you will soon be bitterly, bitterly disappointed.

May 29, 2012

Spain Runs Out Of Money To Feed The Zombies

One of the problems with the Hispanic Pandora's box unleashed by a now insolvent Bankia, which as we noted some time ago, is merely the Canary in the Coalmine, is that once the case study "example" of rewarding terminal failure is in the open, everyone else who happens to be insolvent also wants to give it a try. And in the case of Spain it quite literally may be "everyone else." But before we get there, we just get a rude awakening from The Telegraph's Ambrose Evans-Pritchard that just as the bailout party is getting started, Spain is officially out of bailout money: "where is the €23.5 billion for the Bankia rescue going to come from? The state's Fund for Orderly Bank Restructuring (FROB) is down to €5.3 billion."

From here on out, the alternatives have been discussed to death and are clear as day: either the ECB, and the global central bank syndicate, inflates away the debt, which can only happen if Germany gives the ECB a carte blanche to print up the the $3-5 trillion required to backstop the European financial system, or we proceed straight to an instance of "Odius debt"/debt moratorium/write down, which however with trillions in daisy-chained, rehypothecated, partly submerged within the broker-dealer mediated shadow banking system, liabilities permeating throughout the global financial system, the outcome would be a tremor that shakes the very foundations of the financial system, in the process also impairing the $1 quadrillion OTC derivative credit money pyramid. In other words: nobody wants to, pardon, nobody dares to do anything, and the best Europe, and by implication the world, can hope for is to survive day to day, without launching the terminal financial D-Day. Pritchard's summary of next steps is expected: "The result of Europe's policy paralysis is more likely to be a disorderly break-up as Spain – and others – act desperately in their own national interest. Se salve quien pueda." Only it is not only Europe. It is the entire world. But it will start in Europe. And specifically Spain, which unlike Greece is too big to be swept under the rug. It is also a place where the zombies are now congregating.

In an indication of just how surreal the modern financial world has become, none other than Bloomberg has just come out with an article titled "Spain Delays and Prays That Zombies Repay Debt." We can only surmise there was some rhetorical humor in this headline, because as the past weekend demonstrated, the best zombies are capable of, especially those high on Zombie Dust, or its functional equivalent in the modern financial system: monetary methadone, as first penned here in March 2009, is to bite someone else's face off with tragic consequences for all involved. What Bloomberg is certainly not joking about is that the financial zombies in Spain are now everywhere.

Spain is trying to clean up its banks, requiring lenders to set aside more for possible losses on loans deemed performing to developers like Metrovacesa SA (MVC), which hasn’t completed a project in more than a year and has none under way. While that represents about 30 billion euros ($38 billion) of increased provisions, it’s not enough because many of the loans said to be performing aren’t, said Mikel Echavarren, chairman of Irea, a Madrid-based finance company specializing in real estate.

“Spain has engaged in a policy of delay and pray,” Echavarren said in an interview. “The problem hasn’t been quantified by anyone because there is huge pressure not to tell the truth.”

Yes, lying and ignoring reality are truly signs of a stable, mature system. Just look at Bankia, which went from "profitable" to broke in a few days. And at the risk of repeating ourselves for the nth time, Bankia is merely the beginning.

The Economy Ministry says that Spanish banks have 184 billion euros of developers' loans and assets that are “problematic,” while the remaining 123 billion euros are performing. The need for more reserves to cover losses on the loans can’t be ruled out, Nomura International analysts Daragh Quinn and Duncan Farr said in a May 14 report. If Spain took losses on developer loans like Ireland did, Spanish banks would need 8.9 billion euros under the best case to 76.5 billion euros of additional provisions in the worst scenario, Nomura estimates.

A hole as big as €76.5 billion, plugged with... the €5.3 billion left in the FROB? Good luck. And why is the hole there to begin with? Because of the same lies and same prayers and delays that are now the only policy instrument left in the administration's arsenal:

Many Spanish banks are avoiding property sales so they don’t have to make “mark to market” valuations. Instead, they’re giving developers new loans to pay debt coming due to prevent defaults, said Ruben Manso, an economist at Mansolivar & IAX and a former Bank of Spain inspector.

“The larger banks have been selling bits and pieces and can absorb the losses,” Manso said. “Smaller savings banks are acting in bad faith in their refusal to allow transactions and saying they can’t mark to market because there isn’t one.”

A spokeswoman for CECA, the association for Spanish savings banks, who declined to be identified citing company policy, said the group can’t comment on the banks’ commercial policies.

While there is virtually no clarity, one case gives us a terrifying glimpse into the murky waters beneath the surface:

Metrovacesa, once Spain’s largest developer, is typical of the industry, according to Manso. The Madrid-based company, which once owned HSBC Holdings Plc’s London headquarters and had about a 50 billion-euro market value, was taken over by creditors in 2009 after its largest shareholder struggled to service billions of euros of debt.

Metrovacesa has racked up 1.8 billion euros of losses since 2008. It has debt of 5.1 billion euros and property assets valued at 3.9 billion euros.

“The banks have made writedowns in their Metrovacesa stakes, but they haven’t taken the full hit,” Manso said.

Metrovacesa currently trades at 38 cents a share, valuing the company at about 375.5 million euros. UBS AG downgraded the shares to sell on May 22 and changed its target price to 32 cents. In August, its lenders renegotiated the terms of 3.6 billion euros of its debt, extending maturities on 2.47 billion euros of obligations and granting a five-year grace period for interest payments on 1.12 billion euros of loans.

“Having no controlling stake in Metrovacesa means that its creditor banks don’t have to consolidate the company’s debt or assets and contaminate their own balance sheets,” Manso said. “There are hundreds of cases like Metrovacesa out there, albeit smaller in size, and this distorts the official amount of real estate and bad developer loans that banks profess to have.”

Terrifying, because proper accounting treatment would mean that the abovementioned €76.5 billion in max provisions is really orders of magnitude lower than what the final number will be.

Of course, it wouldn't be an article about a ponzi scheme if it didn't have an official refutation. Sure enough:

Metrovacesa isn’t a zombie, said a company spokesman, who
declined to be named citing company policy.

And That, ladies and gents, just won the prize for the most hilarious denial in the history of denials... to date. As the ponzi unravels more and more each day, the above case will be rather serious compared to what is in the pipeline. But for now, a company spokesman forced to deny that the company he works for is not an undead creature with a penchant for brains does it for us.

Metrovacesa has
projects in mind, but the market doesn’t allow homebuilding, he

Wait, wasn't everything Bush's fault? Or in the worst case: Merkel? Now we get one more culprit for lack of market clearing. Why, the market itself of course.

But if the above hasn't caused blood to shoot out of one's ears yet, the next paragraphs absolutely will.

More than half of Spain’s 67,000 developers can be categorized as “zombies,” according R.R. de Acuna & Asociados, a real-estate consulting firm. They have combined debt of 180 billion euros that will lead to 104 billion euros of losses that hasn’t been fully provisioned for, Acuna estimates.

“They aren’t officially bankrupt because they have been refinanced time and time again,” Fernando Rodriguez de Acuna Martinez, a partner at the company, said by telephone. “Their assets are worth much less than their liabilities, they struggle to repay loans and they haven’t revaluated them to reflect today’s prices.”

And that, in a centrally planned world, is why no company is allowed to go bankrupt - because the central banks merely allow them to refi into perpetuity, even if, as is admitted, "assets are worth much less than their liabilities" - surely a justification to invoke the Fed's emergency Section 13(3) emergency powers...

In the meantime, the Fed's domestic partner, the Bank of Spain is doing all it can to avoid the realization that zombies walk among us:

The Bank of Spain allows loans that are refinanced before turning delinquent and interest-only loans to be considered “normal” or “performing” on banks’ books, according to Manso.

“You won’t find that data anywhere,” Manso said. “There has been a lot of cheating going on where banks have lent developers new money, classed as new lending, so they can pay off their original loans.” That’s masking delinquency, he said.

Refinancing the current and future zombie developers will cost 30 billion euros over the next two years, according to Acuna. The depreciation of those developer assets from 2012 onwards will generate a further 20 billion euros of losses in that time, he said.

And saving the absolute farce for last:

Echavarren’s Irea brokered the refinancing of a 200 million-euro loan two years ago for a developer. After two more rounds of refinancing, there is about 180 million euros left on the loan and it’s classified as performing, he said, without identifying the company.

“The probability that this loan will be paid when it comes due is zero,” Echavarren said. “There are dozens of similar cases.”

Spain’s government and banks need to be more like their counterparts in Ireland and be more forthcoming about loan losses, according to Echavarren. He forecasts that the larger Spanish banks with income from international operations will be able to pay for domestic real-estate losses within two years. The rest can’t take such a hit and will have to be nationalized, he said.

“We cannot continue to jeopardize the whole financial system by not telling the truth,” Echavarren said.

Who says we can not: why, it is the sole prerogative of every central bank not to fight inflation, not to maximize employment, and lately, not even to keep the Russell 2000 over 800. It is merely to perpetuate the lies, to extend and pretend, to keep the zombies in check, to repeal every law of math, physics and statistics known to man: from the second law of thermodynamics, to simple sine wave oscillations, to prop the insolvent as the liabilities get exponentially bigger than the assets, to change accounting rules, and to pretend that reality matters, until everything finally crashes.

Which at this point is a certainty.

For those of an inquisitive nature, the only question is when. But, frankly, even that is becoming less and less relevant with each passing day.

May 28, 2012

"It’s Capital - We Guarantee It!"

In any economy, “capital” is real wealth which has not been consumed. The production of new wealth is dependent on the supply of capital goods or factors of production - above all the tools essential to the task. A capitalist economy is impossible without a further form of capital - a medium of exchange or money. But money does not produce goods, it facilitates their exchange. Any money will do that, but SOUND money provides a still more important service. It allows for economic calculation. And without a reliable form of economic calculation, it is impossible to discover whether a given process of wealth production is viable or not. A SOUND money allows for the reliable calculation of profit or loss in any enterprise. By doing that, it acts to minimise the loss of real wealth by directing new capital into profitable uses and diverting it from uses which do not pay their way.

This is the only process by which any nation can become prosperous. It is entirely short-circuited when the common denominator in all economic calculations - money - is produced by edict and not by effort. It has long been known that it is impossible to “create” wealth out of thin air. It has long been held that money and wealth are synonymous. It is now a tenet of market faith that when it comes to creating money out of thin air - literally anything goes. The contradiction is as glaring as it is ignored.

Today, capital is taken to be a sum of money. This nominal amount is “guaranteed” by government edict and central bank power. The purchasing power of that money is also “guaranteed” by central banks to fall over time but only in carefully controlled annual increments. This is known as “inflation management”. Every central bank has its preferred rate of inflation. Every one of these rates bears no relationship whatsoever with the pace at which these same central banks are creating it out of thin air.

The economic - AND MARKET - distortions resulting from this practice have long since become incalculably huge. They have been fixed into economies everywhere. They must be corrected before any type of genuine wealth creation can once more come forth. That process will crystallise huge losses because of the huge misallocation of REAL capital that has already taken place. There is no way over, under or around this situation. The world is simply going to have to go through it. The longer the paper “capital” underpinning investment markets is preserved, the more painful this process will become.

Capital can NEVER be “guaranteed” - it can only be produced. And governments produce NOTHING.

May 25, 2012

BAILOUT: Former Bailout Watchdog Neil Barofsky to Release Tell-All Account Of Bush/Obama Administration Banking Policies

Neil Barofsky, a former official who actually put bankers in jail (imagine that!) is coming out with a tell-all book called “Bailout” about his experience as the Special Inspector General for TARP. I don’t normally put up press releases, but this book will be upsetting to the administration because this is someone who was involved in the decisions, and Barofsky did not play ball with the Wall Street crowd. Here’s the announcement.

From December 2008 until March 2011, Barofsky was the Special Inspector General charged with oversight of TARP, working to ensure against fraud and abuse in the spending of the $700 billion allocated for the bailouts. From the start he was in constant conflict with the officials at the Treasury Department in charge of the bailouts who were in thrall to the interests of the big banks and steadfastly failed to hold them accountable, even as they disregarded major job losses caused by the auto bailouts and failed to help struggling homeowners. Barofsky recounts how his reports of a wave of criminal mortgage fraud and other abuses being perpetrated against homeowners in connection with programs that the Treasury itself set up were ignored time and again.

Barofsky offers detailed accounts of the behind-the-scenes conflicts and his struggles with Treasury Secretary Timothy Geithner, the Bush appointed “TARP Czar” Neel Kashkari and his successor, the Obama appointed Herb Allison, and others. His revelations show in stark detail just how captured by Wall Street our political system is; why the banks have not been held accountable; and how the failure to enact effective regulation has put the country in danger of an even bigger crisis in the future.

There are two broad narratives about Barack Obama from American elites. On the right, there’s a racist narrative about Obama’s socialist Kenyan origins, with offshoot dishonest arguments about his policies. He’s anti-corporate! He’s gone on a government spending frenzy! He’s going to cut the size of the military! These are not true. On the Democratic side, there’s an equally dishonest set of arguments. He’s not bold enough! Congress is holding him back from his progressive instincts! We haven’t made him do what we know he wants to do! The real Obama is hidden behind a racist veneer on the right, that he’s a Kenyan socialist, and a fake narrative on the left, that he’s not bold enough. The third narrative, which you can find on this blog, is that Barack Obama is a great deceiver, with a charming and cool demeanor that mask his ruthlessness and bank-friendly neoliberal ideology. It’s hard to talk to this third narrative, because Democrats overwhelmingly approve of Obama, and Republicans simply cannot countenance the idea that their socialist enemy is as friendly or even more friendly to corporate power than they are.

But there are a few brave souls who are speaking truth, and the information about who Obama is and what he has done is slowly coming out. Charles Ferguson’s excellent new book, Predator Nation: Corporate Criminals, Political Corruption, and the Hijacking of America, is the first post-mortem of the financial crisis in which the lens is political corruption in both parties and in economics. Ferguson, who made the Academy Award documentary Inside Job, sees the financial crisis first and foremost as a political problem, of oligarchy and a captured political system. The technical details – Volcker Rule, Dodd-Frank, etc – are just that. Ferguson isn’t dancing around the problem, either. He puts the blame on, among other people, Bill Clinton and Barack Obama. I’ll have more on this book.

Still, very few elite actors are actually giving talking to this third narrative. We can see this in the 2012 election, in which, for all its fake heat, Romney and Obama are both trying as best they can to nose each other out, while promising virtually nothing of economic substance to the public. Romney and Obama are simply talking to economic elites who will pay them off - occasionally this becomes obvious, as we’re seeing with a recent flap over private equity. Corey Booker’s comments, when he called attacks on private equity “nauseating”, brought in a brief flash to the public the hidden election of elites behind the scenes making decisions about who to back and why. In the actually race itself, the polling is dead even, and has been since Romney consolidated the nomination. Neither candidate has much power to shift the polls, except through gruesome errors or by talking to voters instead of the economically powerful interests who fund them. The latter won’t happen, the former might. At this point, Alexis Tsipras in Greece and Angela Merkel have more power over the American election than either candidate.

The reality is that it is the strength of Obama’s narrative, and the lack of a left-wing analysis of who he is as a person, that gives Obama all the cover he needs to enact bank-friendly policies. You can see this strength in the utter lack of an effective comedic impersonator of Barack Obama. When Tina Fey first gave her impression of Sarah Palin, the political world exploded in chatter about how perfectly Fey had captured Palin’s character. Will Ferrell nailed something about Bush (as did my favorite impressionist, James Adomian), a kind of juvenile cunning frat-boy type spirit. American comics play the role of the jester, and are sometimes the only ones who can speak truth to power. The comedy world has produced a series of people who can mimic what Obama sounds like, but these people tend to see him as having a heart of gold and hiding his anger at the Republicans. There is no comedian who has captured the breezy self-aware cynicism, the way that Obama dishonestly promises actions he does not intend to follow through on, while giving a sort of running commentary as a meta-pundit on himself and the political system.

A third narrative needs to emerge. A true impression of Obama would be both devastating and hilarious. It would also require a profound level of bravery and skill to showcase a picture of the first black President as a corrupt plutocrat. This lack of comedic insight is directly related to the broader phenomenon of American elite dishonesty about Barack Obama. Comedians get their information largely from the news, and from elite actors who tell them about what is going on. As more people who have direct experience with the administration, people like Barofsky, give clear details about the policy choices (and they are choices, the system is not set in stone) that this administration made, the strength of Obama’s narrative will erode.

May 24, 2012

Cooperative Banking in the Aquarian Age

According to both the Mayan and Hindu calendars, 2012 (or something very close) marks the transition from an age of darkness, violence and greed to one of enlightenment, justice, and peace. It’s hard to see that change just yet in the events relayed in the major media, but a shift does seem to be happening behind the scenes; and this is particularly true in the once-boring world of banking.

In the dark age of Kali Yuga, money rules; and it is through banks that the moneyed interests have gotten their power. Banking in an age of greed is fraught with usury, fraud, and gaming the system for private ends. But there is another way to do banking, the neighborly approach of George Bailey in the classic movie “It’s a Wonderful Life.” Rather than feeding off the community, banking can feed the community and local economy.

Today the massive too-big-to-fail banks are hardly doing George Bailey-style loans at all. They are not interested in community lending. They are doing their own proprietary trading—trading for their own accounts—which generally means speculating against local interests. They engage in high-frequency program trading that creams profits off the top of stock market trades; speculation in commodities that drives up commodity prices; leveraged buyouts with borrowed money that can result in mass layoffs and factory closures; and investment in foreign companies that compete against our local companies.

We can’t do much to stop them. They’ve got the power, especially at the federal level. But we can quietly set up an alternative model, and that’s what is happening on various local fronts.

Most visible are the “Move Your Money” and “Occupy Wall Street” movements. According to the website of the Move Your Money campaign, an estimated ten million accounts have left the largest banks since 2010. Credit unions have enjoyed a surge in business as a result. The Credit Union National Association reported that in 2012, for the first time ever, credit union assets rose above $1 trillion. Credit unions are non-profit, community-minded organizations with fewer fees and less fine print than the big risk-taking banks; and their patrons are not just customers but owners, sharing partnership in a cooperative business.

Move “Our” Money: The Public Bank Movement

The Move Your Money campaign has been wildly successful in mobilizing people and raising awareness of the issues, but it has not made much of a dent in the reserves of Wall Street banks, which already had $1.6 trillion sitting in reserve accounts as a result of the Fed’s second round of quantitative easing in 2010. What might make a louder statement would be for local governments to divest their funds from Wall Street, and some local governments are now doing this. Local governments collectively have well over a trillion dollars deposited in Wall Street banks.

A major problem with the divestment process is finding local banks large enough to take the deposits. One proposed solution is for states, counties and cities to establish their own banks, capitalized with their own rainy day funds and funded with their own revenues as a deposit base.

Today only one state actually does this, North Dakota. North Dakota is also the only state to have escaped the credit crisis of 2008, sporting a sizeable budget surplus every year since. It has the lowest unemployment rate in the country, the lowest default rate on credit card debt, and no state government debt at all. The Bank of North Dakota (BND) has an excellent credit rating and returns a hefty dividend to the state every year.

The BND model hasn’t yet been duplicated in other states, but a movement is afoot. Since 2010, 18 states have introduced legislation of one sort or another for a state-owned bank.

Values-based Banking: Too Sustainable to Fail

Meanwhile, there is a strong movement at the local level for sustainable, “values-based” banking—conventional banks committed to responsible lending and service to the local community. These are George Bailey-style banks, which base their decisions first and foremost on the needs of people and the environment.

One of the leaders internationally is Triodos Bank, which has local offices in the Netherlands, Belgium, the United Kingdom, Spain, and Germany. Its website says that it makes Socially Responsible Investments that are selected according to strict sustainability criteria and overseen by an international panel of “stakeholder” representatives representing various community, environmental, and worker interest groups. Investments include the financing of more than 1,000 organic and sustainable food production projects, more than 300 renewable energy projects, 33 fair trade agricultural exporters in 22 different countries, 85 microfinance institutions in 43 countries, and 398 cultural and arts projects.

Two U.S. banks exemplifying the model are One PacificCoast Bank and New Resource Bank. Operating in California, Oregon and Washington, One PacificCoast is comprised of a sustainable community development bank with around $300 million in assets and a non-profit foundation (One PacificCoast Foundation). Its commercial lending business focuses on such sectors as specialty agriculture, renewable energy, green building, and low-income housing. Foundation activities include programs to “help eliminate discrimination, encourage affordable housing, alleviate economic distress, stimulate community development and increase financial literacy.”

New Resource Bank is a California based B-corporation (“Benefit”) with $171 million in assets, which focuses its lending and banking services on local green and sustainable businesses. New Resource was recognized in 2012 as one of the “Best for the World” businesses, being in the top 10 percent of all certified B-Corporations and scoring more than 50 percent higher than 2,000 other sustainable businesses in overall positive social and environmental impact.

All this might be good for the world, but isn’t investing locally in a values-based bank riskier and less profitable than putting your money on Wall Street? Not according to a study commissioned by the Global Alliance for Banking on Values (GABV). The 2012 study compared the financial profiles between 2007 and 2010 of 17 values-based banks with 27 Globally Systemically Important Financial Institutions (GSIFIs)—basically the too-big-to-fail banks, including Bank of America, JPMorgan, Barclays, Citicorp and Deutsche Bank. According to the GABV report, values-based banks delivered higher financial returns than some of the world’s largest financial institutions, with a return on assets averaging above 0.50 percent, compared to just 0.33 percent for the GSIFIs; and returns on equity averaging 7.1 percent, compared to 6.6 percent for the GSIFIs. They appeared to be stronger financially, with both higher levels of and better quality capital; and they were twice as likely to invest their assets in loans.


Along with the values-based banks, community investment is undertaken in the United States by Community Development Financial Institutions (CDFIs), including Community Development Banks, Community Development Credit Unions, Community Development Loan Funds, Community Development Venture Capital Funds, and Microenterprise Loan Funds. According to the CDFI Coalition, there are over 800 CDFIs certified by the CDFI Fund, operating in every state in the nation and the District of Columbia. In 2008 (the last year for which a report is available), CDFIs invested $5.53 billion “to create economic opportunity in the form of new jobs, affordable housing units, community facilities, and financial services for low-income citizens.”

Two of many interesting examples are the Alternatives Federal Credit Union and Boston Community Capital. Alternatives FCU, located in Ithaca, New York, is committed to community development and social change and is part of the Alternatives Group, which includes a non-profit corporation (Alternatives Community Ventures); a 40-year old trade association of community groups, cooperatives, worker owned businesses, and individuals (Alternatives Fund); and a not-for-profit organization that facilitates secondary capital investment in the credit union (Tomkins County Friends of Alternatives, Inc.). The credit union has over $70 million in assets and offers many innovative financial products, including Individual Development Accounts—special savings accounts for low income residents that offer matching deposits of 2 to 1 up to a certain amount—in addition to more traditional services such as loans for minority and women-owned businesses, and affordable mortgages. The credit union also offers small business development (classes, seminars, consultation, and networking programs), free tax preparation, and a student credit union.

Although its lending programs focus on lower-income borrowers, Alternatives FCU has had lower delinquency and charge-off rates than many major banks that avoid these types of customers. Boston Community Capital (BCC) is a CDFI that is not actually a bank but invests in projects that provide affordable housing and jobs in lower-income neighborhoods. BCC includes a loan fund, a venture fund, a mortgage lender, a real estate consultation organization, a solar energy fund, and a federal New Markets Tax Credit investment vehicle. Since 1985, it has invested over $700 million in local organizations and businesses. These funds have helped build or preserve more than 12,800 affordable housing units, as well as child care facilities for almost 9,000 children and health care facilities that reach 56,000 people. Their investments have helped renovate 850,000 square feet of commercial real estate, generate 5.9 million KW hours of solar energy capacity, and create more than 1,500 jobs.

Less Money for Banks and More for Workers:

The Models of Germany and Japan

Values-based banks and CDFIs are a move in the right direction, but their market share in the U.S. remains small. To see the possibilities of a banking system with a mandate to serve the public, we need to look abroad.

Germany and Japan are export powerhouses, in second and third place globally for net exports. (The U.S. trails at 192nd.) One competitive advantage for both of these countries is that their companies have ready access to low-cost funding from cooperatively-owned banks.

In Germany, about half the total assets of the banking system are in the public sector, while another substantial chunk is in cooperative savings banks. Germany’s strong public banking system includes eleven regional public banks (Landesbanken) and thousands of municipally-owned savings banks (Sparkassen). After the Second World War, it was the publicly-owned Landesbanks that helped family-run provincial companies get a foothold in world markets. The Landesbanks are key tools of German industrial policy, specializing in loans to the Mittelstand, the small-to-medium size businesses that drive the country’s export engine.

Because of the Landesbanks, small firms in Germany have as much access to capital as large firms. Workers in the small business sector earn the same wages as those in big corporations, have the same skills and training, and are just as productive. In January 2011, the net value of Germany’s exports over its imports was 7 percent of GDP, the highest of any nation. But it hasn’t had to outsource its labor force to get that result. The average hourly compensation (wages plus benefits) of German manufacturing workers is $48—a full 50 percent more than the $32 hourly average for their American counterparts.

In Japan, the banks are principally owned not by shareholders but by other companies in the same keiretsu or industrial group, in a circular arrangement in which the companies basically own each other. Even when there are nominal outside owners, corporations are managed so that the bulk of the wealth generated by the corporation flows either to the workers as income or to investment in the company, making the workers and the company the beneficial owners.

Since the 1980s, U.S. companies have focused on maximizing short-term profits at the expense of workers and longer-term goals. This trend stems in part from the fact that they are now funded largely by capital from shareholders who own the company and want simply to grow their returns. According to a 2005 report from the Center for European Policy Studies in Brussels, equity financing is more than twice as important in the U.S. as in Europe, accounting for 116 percent of GDP compared with 62 percent in Japan and 54 percent in the eurozone countries. In both Europe and Japan, the majority of corporate funding comes not from investors but from borrowing, either from banks or from the bond market.

Funding with low-interest loans from cooperatively-owned banks leaves greater control of the company in the hands of employees who either own it or have much more say in its operation. Access to low-interest loans can also slash production costs. According to German researcher Margrit Kennedy, when interest charges are added up at every level of production, 40 percent of the cost of goods, on average, comes from interest.

Globally, the burgeoning movement for local, cooperatively-owned and community-oriented banks is blazing the trail toward a new, sustainable form of banking. The results may not yet qualify as the Golden Age prophesied by Hindu cosmology, but they are a major step in that direction.

May 23, 2012

OPEC Has Lost The Power To Lower The Price of Oil

There’s been a lot of excitement in the past year over the rise of North American oil production and the promise of increased oil production across the whole of the Americas in the years to come. National security experts and other geo-political observers have waxed poetic at the thought of this emerging, hemispheric strength in energy supply.

What’s less discussed, however, is the negligible effect this supply swing is having on lowering the price of oil, due to the fact that, combined with OPEC production, aggregate global production remains mostly flat.

But there’s another component to this new belief in the changing global landscape for oil: the dawning awareness that OPEC’s power has finally gone into decline. You can read the celebration of OPEC’s waning in power in practically every publication from Foreign Policy to various political blogs and op-eds. David Ignatius of the Washington Post wrapped up nearly all of the recent claims in a nice bundle in his May 4, 2012 piece, An Economic Boom Ahead?, when he quoted PFC Energy’s David West:

“This is the energy equivalent of the Berlin Wall coming down,” contends West. “Just as the trauma of the Cold War ended in Berlin, so the trauma of the 1973 oil embargo is ending now.” The geopolitical implications of this change are striking: “We will no longer rely on the Middle East, or compete with such nations as China or India for resources.”

While it’s true that the Americas hold great promise to convert natural gas resources to higher production levels, that is not the case with oil. The celebration of a geo-political swing in energy power therefore misses a crucial point: No region -- from OPEC to Non-OPEC, from Africa to Russia -- has the single-handed ability to lower the price of oil now, because none can bring on new supply quickly enough for a long-enough sustained period of time.

And there is more to this story than meets the eye.

History of OPEC

For over 30 years, OPEC has produced less than half of the world’s oil. Indeed, as of today, OPEC produces only a little more than 40% of the world’s oil. But most of the world’s spare capacity has been held by Gulf State producers. Thus OPEC, primarily Saudi Arabia, has long been able to control the price of oil in not one, but two, directions. Historically this has meant that the concentration of oil pricing power resided with OPEC and its largest producer, Saudi Arabia.

But starting in 2005, global oil markets sensed that OPEC was only able to influence the price of oil in one direction: higher, by lowering output. OPEC’s ability to lower prices started to crack, break up, and generally fail as the first phase of oil’s repricing headed into 2008. Indeed, OPEC raised production several times in the 2004-2008 period, attempting to restrain oil prices as it moved to protect the global economy from an oil shock. However, the oil market, which was going through a fundamental transition at the time, as it reoriented itself towards insatiable, price-insensitive demand from Asia -- paid little attention.

Instead, supply disruptions at small producers and in small regions had a greater influence on oil price (pushing it higher) than OPEC's influence on attempting to push the price lower.

It’s actually not clear that OPEC has had any measurable influence on restraining oil prices for years. Summer hurricanes in the Gulf of Mexico, unrest and outages in the Niger Delta, and various strikes presented greater upward pressure on oil prices than upward OPEC supply changes.

The Mythology of OPEC

There is a trailing cultural myth, therefore, (which is nothing more than a hangover from 30 years ago), that OPEC can mount swift, price-killing upsurges of production. But as the below chart shows, OPEC production has made no progress in at all in the seven years since 2005, as oil began its price transition.

As oil rose above $50 in 2005, eventually reaching $90 in 2007, and then on to levels above $140 in 2008, OPEC production both rose and fell, but without any reliable correlation to price. In the aftermath of 2008, OPEC production has correlated better with the recovery in oil prices. But again, the rise in OPEC production has only come back towards the previous highs from last decade. Here is a recent news story rather breathlessly discussing the most recent OPEC production levels this year:

Acting to mitigate market nervousness amid Iran supply fears, OPEC on Thursday said it was pumping more oil than the market needs—at levels not seen since summer 2008—and expressed a cautiously optimistic note on demand. The cautious optimism, combined with a production boost sufficient to cover all of Iran's oil exports, is likely to further stabilize oil markets, where volatility by some measures has already smoothed in recent weeks. In its latest monthly market report, the Organization of Petroleum Exporting Countries said its crude production was 32.42 million barrels a day in March, up 317,000 barrels a day from the previous month.

Yes, but there’s a neglected point to make: these production levels are not special. Not meaningful. And are not newsworthy in any sense. Production at/above 32 million barrels a day? That level has been reached at least 4-5 times since 2005, with at best weak correlation to price changes.

Let's take a closer look at the global share of oil supply, divided in two between non-OPEC and OPEC production.

Non-OPEC vs. OPEC Oil Production

There are several possible conclusions to draw from the above chart, which shows that non-OPEC provided nearly 58% of global crude oil supply in 2011, and OPEC provided 42%.

1.Non-OPEC is the domain of private oil companies, and has managed to increase its market share over the past 30 years through competition and through the use of technology.
2.OPEC’s market share has stagnated, possibly due to the predominance of state-run oil companies and the interference of political structures.
3.Non-OPEC has the pricing power, due to its larger market share.
4.Or perhaps OPEC still retains the pricing power, due to its greater quantity of spare capacity.

There’s an element of truth in each of these observations.

Many also believe that both OPEC and non-OPEC could be producing a lot more oil. In the case of OPEC, many harbor the view that state-run producers and governments are sitting on massive, hidden spare capacity and retaining it as a cartel to manipulate oil prices higher. In the case of non-OPEC, many believe that environmentalists, regulations, and other limits placed by democratically-elected governments are suppressing a wall of supply that could come to market easily if only the oil is ‘set free.’

These views, however, are not only extreme but shaky. They are typical of the kind of grand claims that fit people’s worries and suspicions, rather than fitting any empirical data. The fact is that OPEC spare capacity has been under pressure for some time despite persistent belief to the contrary, with estimates running below 3 mbpd, or even below 2 mbpd. (For recent commentary on OPEC spare capacity, see A Model of Oil Prices by Chris Nelder). The case for hidden, held-back oil capacity in OPEC is weak, especially as domestic populations in the Gulf have dramatically increased the consumption of their own oil.

Meanwhile, non-OPEC large producers like Russia have significantly increased production this past decade. And regions like North America have been able to slow declines. Western oil companies -- which dominate non-OPEC production -- have scoured the globe looking to replace their reserves, but largely to no avail. This is why ExxonMobil and ConocoPhilips eventually gave up, capitulated, and bought natural gas assets instead. By doing so, they followed in the steps of Royal Dutch Shell, which had taken the natural gas pathway years earlier.

Therefore, a fact about non-OPEC production that was unknown even to the industry ten years ago is now very plain: There just isn’t a vast quantity of new oil that can come online easily and inexpensively outside of OPEC-controlled regions. Only Russia, the largest non-OPEC producer and now the largest single country producer in the world -- eclipsing even Saudi Arabia -- was able to significantly increase production.

A Window into Non-OPEC Supply: Russia

Two charts will tell us all we need to know about the limits facing non-OPEC crude oil production. First, let’s take a look at total non-OPEC production on an annual basis:

Just as with OPEC production, little if any progress has been made in the past seven years. This has been a complete surprise to most analysts, especially within the industry itself. Who would have thought that with a regime change in oil prices, non-OPEC could not sustainably increase production to much higher levels? Instead, non-OPEC production remains stuck around a ceiling, just like OPEC.

The Big Reveal comes, however, when we take a look at non-OPEC supply without Russia.

Without Russia, non-OPEC supply has actually lost about a million barrels a day of production in the last ten years. This speaks volumes to the quickly-rising costs of bringing on a new barrel of oil in non-OPEC regions, which we will discuss further in Part II of this report.

The Price of Oil When OPEC Is Powerless

Let’s imagine for a moment that OPEC could, if it chose to, pour an extra 3 mbpd of oil on the world market. And that by doing so, it could lower the price of WTIC oil to $90 or less. What would that accomplish? And for how long would such “lower” prices last?

In Part II: The Cruel Math of the Marginal Barrel, we explain that while fluctuations in economic activity can certainly raise and lower the price of oil, there are deeper structural reasons why OPEC -- even with its spare capacity -- can no longer sustainably “lower” the price of oil. Moreover, we will discuss how, paradoxically, any surge of supply from OPEC which did persuasively lower the price of oil could wind up having the opposite effect on price eventually thereafter.

Surprising? Yes, but not strange or unlikely, for reasons we will explain. Finally, we conclude that oil’s floor price -- outside of volatile 30-90 day periods -- is higher than ever before. This will make for a large surprise, should another acute phase of the financial crisis rock oil prices lower over a 2-3 month period.

May 22, 2012

Could the Eurozone Crisis Cause Another Lehman Moment?

The Lehman Brothers bankruptcy is perceived of as the 9/11 of the financial crisis, the moment where liquidity problems that had been bubbling since late 2006 turned into a full-fledged panic and then economic collapse. The question American elites are pondering is, will a Eurozone break-up, or even Greece leaving the Euro, cause another such moment? Ben Bernanke has argued that Greece leaving wouldn’t, since domestic banks have reduced their exposure to problem countries. Paul Krugman agrees, and in a recent interview on Bloomberg, laid out his case.

Question: How interdependent right now, how linked is Europe to the United States?

Paul Krugman: The sheer, the trade linkage, the thing people think well we export to Europe, that’s a lot smaller than people imagine. We only sell 2% of our GDP to Europe, so even a serious European recession, it hurts, obviously, it’s not a good thing, but it’s not that big a deal. The real concern for this side of the Atlantic is financial. Do we see a blowup in European financial markets that spreads worldwide the way ours did? And you know it’s, maybe I ate the wrong thing for breakfast or something, but I’m fairly optimistic that that won’t happen…. Between Mario Draghi and Ben Bernanke, that they can throw enough money at the banking system to keep this thing from being a financial meltdown. I can believe that and believe at the same time that Greece is going to be out of the Euro fairly soon and that there’s a risk that the whole Euro will break up. I don’t think we’re looking at a Lehman style event, which means the impact on the US economy will be fairly limited. Famous last words, knock on wood.

Yet, a key dynamic in the Lehman situation was ignorance – no one quite knew how bad the problem really was. Similarly, no one knows how bad this Eurozone problem will get, or what the linkages are to American banks. It’s possible the linkages are very very significant. Remember that Bloomberg story from last November, in which JP Morgan and Goldman disclosed to shareholders they have sold credit protection on $5 trillion of global debt? They wouldn’t disclose many details, but that’s a fairly large amount of credit protection.

A few days after Krugman’s Bloomberg interview, we began to learn a bit more about what JP Morgan is betting on, that led to a few billion dollars in losses (so far). And it has a direct bearing on the transmission of Eurozone problems to the US.

The unit, the chief investment office (CIO), has been the biggest buyer of European mortgage-backed bonds and other complex debt securities such as collateralised loan obligations in all markets for three years, more than a dozen senior traders and credit experts have told the Financial Times.

So, apparently, aside from trillions in sold credit protection on global debt, the biggest American bank by revenue and profit is deep into speculative investments on European housing bonds. What could possibly go wrong? What’s interesting about JP Morgan’s losing bet in a relatively placid environment is how shocked people on Wall Street and in DC were. This is worrisome, because it implies that market actors simply do not know that there are still severe risks in the banking system, just as they did not understand shadow banking vulnerabilities in 2007-2008. They believed Bernanke’s PR about the “great moderation”, that financial risk had been diversified and effectively managed away.

The cult of personality around Dimon is similar a testament to elite ignorance of possible risks in the banking system. The Dimon story is that JP Morgan escaped the subprime debacle because of the CEO’s wonderful risk-management skills. But one possible reason JP Morgan escaped some of the housing damage is because JP Morgan’s MBS team just wasn’t very good at originating loans and issuing securities. Dimon’s one superb skill is PR, so he turned this weakness into a message of prudence. In 2007-2008, as the crisis unfolded and banks began cutting back on spending, the rumors were that Dimon stepped up and funded very significant amounts of lobbying and PR in DC. Thus, “fortress balance sheet”. And now, there are laudatory stories in the Wall Street Journal about how Dimon “couldn’t breath” after he learned of possible losses, and how he admitted the problem is taking decisive action. Of course, the more likely story is that JP Morgan isn’t well-managed and has risks and interdependencies we don’t understand.

With this in mind, let’s look at whether the Eurozone crisis could turn into a financial panic in the US.

Lehman was the light-switch to full-fledged panic mode during the financial crisis. Investors, over the past thirty years, had moved their deposited money from the regulated banking system covered by deposit insurance to the shadow banking system, where returns were higher but there was no government insurance. One key area where this took place was in money market funds, which held roughly $4 trillion. While technically money market funds are not insured, in reality investors saw them as safe liquid deposits. While they weren’t backed by government guarantees, they were backed by unassailable triple A rated assets, such as, well, Lehman Brothers bonds. So when Lehman blew up, there was the beginnings of a bank run-style panic in the money market funds. Most normal people have their savings in the regulated banking system, so they weren’t in trouble, but wealthy people, foundations, and corporations were in panic-mode. The Federal Reserve eventually stepped in and backstopped the money markets.

Lehman’s bankruptcy had a tremendous psychological impact on the political officials who forced the investment bank to file for bankruptcy, such as Tim Geithner and Ben Bernanke, as well as the entire economics and financial establishment. Subsequently, their attitude became so risk-averse in restricting banks or financial elites, lest they trigger another Lehman-style situation. It was very much a “9/11 changed everything” attitude, except with a financial shock in place of 9/11.

But the real question with Lehman was political, not technocratic. Would the government force the wealthy to pay for their use of the shadow banking system by allowing a run in the money markets, or nationalizing the money markets and forcing haircuts on money market accounts? Would the voters prevent bailouts with deep rage once they realized what was going on? When the government allowed Lehman to fail, the answers seemed like they verged on yes. But as soon as the markets realized, over the course of the next year, that the government would do everything possible to ensure that the shadow banking system would function, with an effective backstop, and that the voters were powerless to act, the panic subsided.

The question of the Eurozone’s impact on the US financial system is similar. If the Eurozone breaks up, or even if Greece defaults, it is not obvious who is exposed, or by how much. It’s not clear if the credit protection sold on European bonds would have to be paid out, because there is now no standard for sovereign defaults. There’s also counterparty risk. The number of bets internally at any of our banks is also an unknown. And then there are the unknown unknowns. That Wall Street is shocked by Dimon’s incompetence is in itself an indication that the environment is well-designed for panic.

As Krugman notes, the question on the Eurozone is whether governments, international institutions and central banks will throw enough money at the various national banking system to prevent defaults. Since there are swap lines between the Federal Reserve and the European Central Bank, the ECB can get as many dollars as it wants, in return for colored pieces of paper known as the Euro. American politicians could begin to get edgy on Federal Reserve exposure to the Eurozone. And ultimately, the ECB must be backed by Germany, so the question of what happens will come back to the German political establishment and the politics of austerity. Will Germany pick up the tab for Italian, Spanish, and Greek debt, which is really just a bailout for its own (and French) banks? Will the Greeks vote for anti-bailout parties in the upcoming election?

What I find most disturbing about the question of Eurozone is how little we still know about our own banking system, and how sanguine we are about the extent of American exposure to another financial panic. The assumption that our banks are now well-capitalized, that they have been effectively stress-tested, is, while not completely pervasive, still accepted by a shockingly large number of market actors. It should be pretty clear that our banks are large, rogue, and fragile, and that we just don’t know what they are exposed to, or how their exposures could impact the real economy. Dodd-Frank was a missed opportunity to restructure our banking system to make it more resilient and less able to transmit financial shocks. We may soon get another one. I don’t know if the European establishment is going to prevent the dissolution of the Eurozone or keep Greece in the Euro, but I’m not confident that we can avoid a panic if it does.

May 21, 2012

Facebook IPO Is Bubble Redux?

A global frenzy buzzes now like so many angry bumblebees. At any moment, a company started in a dormitory just eight years ago will sell promoted common shares to the investing public and become the hottest technology diva ever. Unusual animal movements have preceded extraordinary natural disasters—might they also mark onset of man-made financial mayhem? Hundreds of millions of us like using Facebook. At first blush the features and benefits seem a compelling bargain. But as far as investors in this offering are concerned, are valuation levels for Facebook's Class A common shares supported by realistic hope or by artful hype? – Washington Times

Dominant Social Theme: Now that Facebook is worth US$ 100 billion, where's the next hot deal?

Free-Market Analysis: Frankly, we've been surprised by the lack of articles doubting Facebook's US$ 100 billion valuation.

This article in the Washington Times, written yesterday, is about the closest we could come, recently, in the mainstream media.

We've been frank about our perception of what Facebook is – a creation in part of American Intel, which evidently and obviously has a stake in utilizing the data that Facebook "mines."

For this reason we have described Facebook as lacking a business model, which is odd for a company that was just valued at US$ 100 billion.

Where is this business model?

Google provides a service – a search algorithm. Microsoft provides computer software. Apple provides innovative and beautiful software.

We had the same nagging skepticism when it came to Yahoo. One day, not so long ago, we realized that whatever Yahoo had been, it wasn't that now. We couldn't define, in fact ,what Yahoo was – and others seem to feel the same way. Yahoo is on a long skid down.

And what about Facebook? It sells "connectivity" – but really, that's a fairly ubiquitous thing in this era of technology togetherness.

One can connect in many ways.

Thus, Facebook's barrier to entry is exquisitely thin. It can be undone at any time. Anyway, connectivity doesn't seem to us to be a very good business model. A business model, after all, involves money – invoices and payments.

What exactly is the bottom line for Facebook? As we tried to point out previously, the viewers themselves are not easily monetized. Many of Facebook's users may have double or triple accounts. Many may not use the system very often.

GM just pulled ads. And Mark Zuckerberg just bought a company he deemed a threat to Facebook. He paid US$ 1 billion for it.

Neither of these incidents bode well for Facebook and so we return to our original proposal. Essentially, the company is worth whatever information it can pilfer from its client base. And that information may be worth more to the American intelligence companies that apparently crowd around Facebook than to the private sector itself.

This is a company, then, that is fundamentally at war with its users. It provides the "thinnest" of services – social connectivity.

Go online and it is hard to find a kind word for Facebook. Feedback to articles (not the articles themselves) is crammed with comments on Facebook's various problems from a business standpoint.

Many deplore Facebook's lack of real privacy and manipulation of data and are skeptical about the company's prospects going forward. We share the same sentiments.

We cannot account for the US$ 104 billion that the company is putatively worth now. Google, with ten times the earnings, is worth the same amount, capitalization-wise.

Here's an interesting comment from Keith Hunt, managing partner of Results International, in an article at The Drum about the Facebook valuation:

For something to be worth over $100bn and still be in a reasonably early stage in its development, you'd want to be confident that there's some massive growth opportunities. I think the opportunity for it to grow at $150bn or $200bn is seriously limited.

Personally I think there's a real danger that Facebook is starting to peak. Its most recent quarterly revenues were down on the previous period. There's also various comments around about how the revenue comes from advertising but the advertising doesn't really work when Facebook is used in mobile devices, which is increasingly where internet usage is coming from.

So if I was investing in it I would wait for it to go up 10 to 20 percent and then take the profit and not hang on for the longer-term.

I think there is a real danger of another bubble around this. Not a dot-com bubble of the nature we saw in 2000-2001, because dot com's here to stay and will continue to grow, but within that companies can get overhyped. For me it was a massive danger signal when they paid a billion dollars for Instagram.

They were a bit too willing to spend $100bn to fix a problem when $100m might've done it. When they see their own business valued at $100bn it's easy to think nothing of spending $1bn on something else.

Good point. The money being tossed around this Facebook deal is phenomenal. Central banks, in fact, have printed so much money over the past four years that some of it has got to go somewhere.

Some of it has gone toward Facebook.

There will be plenty of analysis over why Facebook is worth so much. Few will conclude that the valuation is simply another manifestation of central bank overstimulation of the money supply. But there were several large dotcom deals last year – and now this.

Conclusion: Free-market economists will likely have a different view. This Facebook deal may mark either the beginning or end of another dotcom go-round – yet another speculative bubble brought to you by the good, gray bankers of the Federal Reserve and Bank for International Settlements.

May 18, 2012

Everything You Need To Know About Europe's Dilemma In 4 Minutes

The current crisis of the Eurozone is a result of the imbalance of economic power between the core and the periphery but once one understands the non-economic and completely political strategy that is occurring, comprehending the at-times-incredible decision-making (or lack thereof) is at least easier to digest. Stratfor's Adriano Bosoni provides a very succinct description of everything you wanted to know about Europe's 'situation' but were afraid to ask in under 240 seconds.

"At the center of the debate lies the question of national sovereignty, the core and periphery of Europe will then have to decide how much (or how little) they are willing to compromise in order to find a way out of the crisis. The answer to this question will not be the result of an economic analysis - it will be the result of a political calculation."

May 17, 2012

Michael Crimmins: Why the Cops Should be Knocking on Jamie Dimon’s Door Soon

The scandal surrounding JP Morgan’s losses in its Chief Investment Office is not going away, and for good reason. Its trading book continues to lose money at an astounding rate. The most recent report estimates that the losses have increased by at least 50% more than the bank’s original loss estimates. The total damage is anyone’s guess at this point.

This fiasco is beginning to look a lot like accounting control fraud. The Justice Department and the FBI have begun criminal probes. The SEC is also investigating. So far, the objectives of these investigations are under wraps, but if I were an SEC or DOJ enforcement official I’d be laser-focused on bringing a Sarbanes-Oxley case against Jamie Dimon.

Sarbanes-Oxley emerged out of the Enron frauds. This law requires the CEO to certify that internal controls are operating effectively to give comfort to readers of the financial statements that the disclosures contained in the reporting are reliable. There are civil penalties for filing a false certification and criminal penalties, including jail time, for false filings found to be fraudulent. So far none of the obvious candidates like Dick Fuld at Lehman or Jon Corzine at MF Global have been prosecuted under the law.

Jamie Dimon looks like a very attractive candidate to investigate for SOX violations.

For starters, Dimon’s description of what happened rings SOX alarm bells:

First of all, there was one warning signal — if you look back from today, there were other red flags. That particular red flag — you know, we made a mistake, we got very defensive and people started justifying everything we did. You know, the benefit in life is to say, ‘Maybe you made a mistake, let’s dig deep.’ And the mistake had been brewing for a while, so it wasn’t just any one thing.

- Meet the Press, May 13, 2012

Warning signs and red flags were ignored. And they’ve apparently been ignored since 2007. Once again, echoing what happened at MF Global, risk managers who raised alarms about the riskiness of the positions in 2009 were replaced with more cooperative risk managers:

Several bankers said that risk controls were not sufficiently strengthened by Doug Braunstein, who took over as chief financial officer in 2010, another reason the bolder trades continued.

This indicates the firm was aware of deficiencies in the controls if other executives knew Braunstein had a mandate to improve them. These concerns are probably documented in the meeting minutes of the management committees responsible for risk, financial reporting and SOX compliance. It shouldn’t be difficult for the SEC to review these sources to determine who knew what and when about the state of the internal control environment.

JPM has issued quite a few financial statements since 2007 and 2009. If the controls and riskiness of the trades were as alarming and deficient as the managers indicate, then the reliability of the financial statements for the last 5 years are questionable. For a portfolio of this size and importance it’s inconceivable that the controls and risk issues were not reported up the management chain.

More damning is Dimon’s tacit admission that the controls designed to protect the firm from these sorts of blowups were ineffective, due to lack of intervention. Ignoring internal controls, or red flags as Dimon characterizes them, is a failure in the control environment. The failure to disclose inoperative key controls in the CEO certification is a violation the law.

That’s the big picture case. Recent reporting about the trade itself point to other areas that should be investigated for Sox violations.

When is a Hedge not a Hedge?

It appears that the JPM portfolio ‘hedge’ isn’t a hedge at all, at least according to current accounting standards. As Dina Dublon, CFO of JP Morgan Chase from 1998 to 2004, explained:

Dublon also pointed out that JP Morgan’s $200 billion mistake was not an accounting loss. “There is a difference between accounting and economic valuations,” she said. “You have a mark-to-market hedge against an accrual exposure that is not being marked to market. So you can have a gain or loss on the hedge, but you will not recognize the change in value of the loan portfolio, which is on an accrual accounting basis.

Translating this into non accountant language, JPM had a portfolio of assets which are available for sale. The change in the value of those securities is tracked, but since they aren’t considered to be trading assets, the change in value doesn’t hit the bottom line until they are sold. By contrast, positions held in trading books are “marked to market,” meaning they are revalued as market prices change and the resulting gains or losses are reported on an ongoing basis.

JPM reported that this portfolio contains significant unrealized gains. Indeed, it realized some of those gains to offset the losses on the portfolio ‘hedge’.

To hedge this portfolio JPM bought and sold credit default swaps. This portfolio ‘hedge’ is accounted for on a mark to market basis. This is odd since a true hedge should get the same accounting treatment as the asset it’s hedging. This indicates that the ‘hedge’ failed the hedge effectiveness test required by the accounting rules that would qualify it for hedge accounting treatment. More precisely the correlation between the hedge and the underlying isn’t strong enough to qualify it as a hedge.

Further confirmation that the ‘hedge’ wasn’t technically a hedge comes from Jamie Dimon himself.

In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective an economic hedge than we thought.

As Dublon explained above, “There is a difference between accounting and economic valuations.” Dimon takes care to refer to the ‘economic hedge’, which is a term of art. It has no significance for financial disclosure purposes. It means whatever the user wants it to mean. If Dimon has not been vigilant in using the phrase ‘economic hedge’ in his disclosures and public comments about this portfolio then he’s made some false disclosures.

An “economic hedge’ is not a ‘hedge’ for financial disclosure purposes. ‘Economic hedge’ is a meaningless phrase. The abbreviated term ‘hedge’ when used to describe the trading portfolio embedded in the CIO book is a false characterization of the portfolio. He should not be permitted to describe this as a hedge in any of his comments about this book. At a minimum, he should be called on it every time he utters the phrase.

If It’s Not a Hedge Then What is It?

To recap, JPM owns a portfolio of securities it is ‘economically hedging” with a portfolio of credit default swaps. The purpose of a hedge is to reduce the risk of adverse price moves on the underlying portfolio.
The CDS portfolio consists of CDS purchased and CDS sold.

CDS purchased for the portfolio may have been put on as a hedge against the “available for sale” portfolio. But the CDS sold as a hedge doesn’t seem to make any sense. Selling CDS is equivalent to increasing the exposure to the underlying credits. The CDS sold don’t seem to have a risk mitigating role as part of a hedge, but to date JPM hasn’t provided the information to evaluate the overall portfolio.

It’s possible JPM was funding the CDS purchases by selling longer dated CDS and justifying the inclusion of the CDS sales as funding of the hedging purchases, but that would seem to be pretty expansive definition of a hedge. Perhaps ‘economic hedging’ as JPM defines it includes the funding sources of the combined ‘economic hedge’. That seems ridiculous but the term is open to any interpretation.

Since the combined CDS portfolio is accounted for on a mark to market basis, the position may not have raised any red flags with readers of the financial statements as long as it was in the money. That appears to have been the case for an extended period, as evidenced by the enormous pay packages (over $100 million for the chief trader, the infamous Whale, if reports are to be believed) for the CIO desk. You don’t pay that kind of money to hedgers.

But the position has cratered this year and JPM was forced to disclose the losses on the CDS portfolio. To offset those losses JPM sold off some of its AFS portfolio. We’re still waiting for a precise definition of economic hedge from JPM.

This characterization raises additional alarms, since it appears that JPM effectively viewed the AFS/CDS portfolio combination as a net trading position. Normally, you wouldn’t sell your AFS portfolio (or enjoy the beneficial accounting treatment) unless there was an extraordinary exogenous event that caused you to liquidate the portfolio. Trading losses on a portfolio jointly managed as part of the AFS portfolio wouldn’t qualify.

This raises the question of whether JPM has correctly classified the available for sale assets since they acquired them. That’s a serious issue. If JPM misclassified a $200B position for years, it should be investigated for a host of regulatory violations and fraud.

For all intents and purposes the hedge portfolio is a separate trading book, and the financial reporting reflects that fact. There should be no way JPM should be able to spin this as a hedge of anything and deny the proprietary trading characterization the accounting treatment signifies.

What’s up With the Value at Risk?

Another area the SEC needs to investigate is the curious restatement of the VaR, which is a measure of risk used in disclosures to investors and regulatory reviews.

As discussed above, the risk exposure of the marked to market positions (the hedge porfolio) must be disclosed in the financial statements. JPM recently replaced the VaR model for this portfolio. It appears that the new model significantly understated the risk exposure and the bank has hastily reverted to an “older” model. One benefit of a reduced risk exposure is a reduction in capital held against the portfolio. Under the new model JPM would only have been required to hold half as much capital on the portfolio, than it did under the original model

It is extremely unusual that a risk model for such a critical portfolio isn’t exhaustively vetted both internally and by the regulators before it was permitted to be installed. There was clearly a breakdown in the controls around that model replacement. This breakdown resulted in a significant and material underreporting of risk in the initial 1Q 2012 SEC reporting. The restatement validates that a material breakdown in internal controls existed before the model was implemented.

It also raises other questions. Blaming models for management failures has become a fairly standard first response during the financial crisis. When HSBC took their first big hit on their securitization business in the 2007 (for fiscal year 2006), and shut down their US securitization business, they attributed the losses to the discovery that their credit risk models were flawed. I have no doubt this was true, but the discovery of the flawed model also coincided with the beginning of the collapse of the RMBS market.

The revelation by JPM in the days immediately following the reports of the Whale’s trade, that the new VAR model seriously underestimated the riskiness of the portfolio, is more significant to a SOX investigation around adequacy of controls than an investigation into the adequacy of the model itself for risk management purposes.

This sort of “whoops our models understated risk” is a convenient way to shift blame off management to “model error” for a decision to take on additional risk. Given that easy profits in banking are vanishing, which are we to believe: that JPM, heretofore seen as a leader in the CDS marker, suddenly became grossly incompetent? Or did they decide to take on more risk and implement models that would mask from regulators and the public the scale of the wagers they were taking?

It also raises concerns about other models use for these portfolios. Many of the underlying assets in the portfolio are illiquid and complex securities. The models used for pricing these instruments and reporting valuations deserve additional scrutiny at this point as well.

It doesn’t look like JP Morgan made a bunch of egregious mistakes. It looks like they broke the law, at least the Sarbanes-Oxley law.

May 16, 2012

Drop the Cash From Helicopters!

Narrow M1 data for April is the weakest since modern records began. Real M1 deposits – a leading indicator of economic growth six months or so ahead – have contracted since November. They are shrinking faster that at any time during the 2008-2009 crisis, and faster than in Spain right now, according to Simon Ward at Henderson Global Investors ... "China is in deflation," says Charles Dumas from Lombard Street Research. Yes, consumer price inflation is 3.4pc – though falling – but consumption is a third of GDP. Fixed investment is 46pc, and here prices have dropped 3.5pc in six months. Export prices have dropped 6.6pc ... All the BRICs need watching. India's industrial output fell 3.5pc in March. The country seems caught in a 1970s stagflation vice. Brazil has softened too, with car sales down 15pc and industrial production contracting in March. The bad loans of the banks have reached 10.3pc, higher than post-Lehman. The bubble has probably popped already, but hoteliers in Rio are hanging on. The European Parliament has pulled out of the UN's Rio forum on sustainable development in June because the rooms are exorbitant. "We are short the vastly over-vaunted and over-owned BRICs," says hedge fund contrarian Hugh Hendry. – UK Telegraph

Dominant Social Theme: If only we could print as much money as we want. That would make the banks happy, anyway ...

Free-Market Analysis: Ambrose Evans-Pritchard has gotten to the heart of the matter in a recent article on monetary contraction (see above). He rightly points out that less money is circulating but then comes quickly to a Keynesian conclusion that more money will provide the antidote.

Because of all of the conflicting information surrounding this subject, it takes a long time to figure it out. But one thing is for sure: "Printing" money is not the solution.

Unlike many, Evans-Pritchard has gotten the problem right in the past. For a variety of reasons, money is not circulating around the world.

But the solution is not to print more of it! What the power elite that controls central banking around the world simply doesn't want to explain is that trying to shove more money into the larger economy is a nonstarter.

The world is full to the gills of money that is not circulating already. If money sits in bank vaults uncirculated because people don't want to borrow, then the "economy" will not expand, locally, regionally or nationally.

The distortions of the current system need to be removed. The largest banks and financial facilities need to compete on an even playing field and rise or fall on their own merits. This STILL has not happened, some four years into the financial crisis.

Now, as well, there has been some suggestion in the past that central banks are in a sense discouraging the circulating of money by basically paying banks to let money sit on the shelf.

We would not count out this possibility. It's our contention that the powers-that-be are likely driving the world into a kind of planned depression, one that includes Europe, the US and the BRICs as well. Evans-Pritchard seems to see somewhat the same picture – regardless of the "planning" part:

The BRICS helped save us in 2008-2009. If we now face a global crisis on all fronts – and such an outcome can still be avoided – it will test the mettle of world leaders. Interest rates in the G10 are mostly zero already, and budgets are frighteningly stretched.

Sensing what is coming, Citigroup's chief economist Willem Buiter says global central banks have not yet exhausted their arsenal. They can "and should" crank up quantitative easing (QE), buy everything under the sun, and do "helicopter money drops".

I would go even further. Sovereign central banks have the means to defeat any depression thrown at them by launching mass purchases of assets outside the banking system, working through the classic Hawtrey-Cassel quantity of money mechanism until nominal GDP is restored to its trend line.

The problem is not scientific. A world slump is preventable if leaders act with enough panache. The hindrance is that the Euro Tower still haunted by Hayekians, and most G10 citizens – and Telegraph readers from my painful experience – view such notions as Weimar debauchery, or plain Devil worship. Economists cannot command a democratic consent for monetary stimulus any more easily today than in 1932.

Pritchard believes that central banks ought to print money and then buy up diseased assets – specifically financial ones. Presumably he must believe this because he writes for the UK Telegraph.

But we do not. And so we are free to point out that if an asset is diseased to begin with, merely buying it up with more money-from-nothing is not going to make the asset healthier.

This is merely a recipe for prolonging the pain until the larger economy gradually rights itself. But in truth this will never happen.

Gradually, as a result of intensive money printing, the powers-that-be will blow more bubbles and create what appears to be a recovery but shall not be.

And that is best case. Worst case, economies stagger on while central bankers continue to print money and further inflate the system. Inevitably, then, the system provides even fewer jobs while living expenses go up.

Conclusion: The problem is admirably stated in this article, but not the solution. The real solution is to let the larger economy unwind and let failing firms go out of business. Printing more money only prolongs the pain.

May 15, 2012

The 2 Billion Dollar Loss By JP Morgan Is Just A Preview Of The Coming Collapse Of The Derivatives Market

When news broke of a 2 billion dollar trading loss by JP Morgan, much of the financial world was absolutely stunned. But the truth is that this is just the beginning. This is just a very small preview of what is going to happen when we see the collapse of the worldwide derivatives market. When most Americans think of Wall Street, they think of a bunch of stuffy bankers trading stocks and bonds. But over the past couple of decades it has evolved into much more than that. Today, Wall Street is the biggest casino in the entire world. When the "too big to fail" banks make good bets, they can make a lot of money. When they make bad bets, they can lose a lot of money, and that is exactly what just happened to JP Morgan. Their Chief Investment Office made a series of trades which turned out horribly, and it resulted in a loss of over 2 billion dollars over the past 40 days. But 2 billion dollars is small potatoes compared to the vast size of the global derivatives market. It has been estimated that the the notional value of all the derivatives in the world is somewhere between 600 trillion dollars and 1.5 quadrillion dollars. Nobody really knows the real amount, but when this derivatives bubble finally bursts there is not going to be nearly enough money on the entire planet to fix things.

Sadly, a lot of mainstream news reports are not even using the word "derivatives" when they discuss what just happened at JP Morgan. This morning I listened carefully as one reporter described the 2 billion dollar loss as simply a "bad bet".

And perhaps that is easier for the American people to understand. JP Morgan made a series of really bad bets and during a conference call last night CEO Jamie Dimon admitted that the strategy was "flawed, complex, poorly reviewed, poorly executed and poorly monitored".

The funny thing is that JP Morgan is considered to be much more "risk averse" than most other major Wall Street financial institutions are.

So if this kind of stuff is happening at JP Morgan, then what in the world is going on at some of these other places?

That is a really good question.

For those interested in the technical details of the 2 billion dollar loss, an article posted on CNBC described exactly how this loss happened....

The failed hedge likely involved a bet on the flattening of a credit derivative curve, part of the CDX family of investment grade credit indices, said two sources with knowledge of the industry, but not directly involved in the matter. JPMorgan was then caught by sharp moves at the long end of the bet, they said. The CDX index gives traders exposure to credit risk across a range of assets, and gets its value from a basket of individual credit derivatives.

In essence, JP Morgan made a series of bets which turned out very, very badly. This loss was so huge that it even caused members of Congress to take note. The following is from a statement that U.S. Senator Carl Levin issued a few hours after this news first broke....

"The enormous loss JPMorgan announced today is just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making."

Unfortunately, the losses from this trade may not be over yet. In fact, if things go very, very badly the losses could end up being much larger as a recent Zero Hedge article detailed....

Simple: because it knew with 100% certainty that if things turn out very, very badly, that the taxpayer, via the Fed, would come to its rescue. Luckily, things turned out only 80% bad. Although it is not over yet: if credit spreads soar, assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20 billion loss when all is said and done. But hey: at least "net" is not "gross" and we know, just know, that the SEC will get involved and make sure something like this never happens again.

And yes, the SEC has announced an "investigation" into this 2 billion dollar loss. But we all know that the SEC is basically useless. In recent years SEC employees have become known more for watching pornography in their Washington D.C. offices than for regulating Wall Street.

But what has become abundantly clear is that Wall Street is completely incapable of policing itself. This point was underscored in a recent commentary by Henry Blodget of Business Insider....

Wall Street can't be trusted to manage—or even correctly assess—its own risks.

This is in part because, time and again, Wall Street has demonstrated that it doesn't even KNOW what risks it is taking.

In short, Wall Street bankers are just a bunch of kids playing with dynamite.

There are two reasons for this, neither of which boil down to "stupidity."

The first reason is that the gambling instruments the banks now use are mind-bogglingly complicated. Warren Buffett once described derivatives as "weapons of mass destruction." And those weapons have gotten a lot more complex in the past few years.

The second reason is that Wall Street's incentive structure is fundamentally flawed: Bankers get all of the upside for winning bets, and someone else—the government or shareholders—covers the downside.

The second reason is particularly insidious. The worst thing that can happen to a trader who blows a huge bet and demolishes his firm—literally the worst thing—is that he will get fired. Then he will immediately go get a job at a hedge fund and make more than he was making before he blew up the firm.

We never learned one of the basic lessons that we should have learned from the financial crisis of 2008.

Wall Street bankers take huge risks because the risk/reward ratio is all messed up.

If the bankers make huge bets and they win, then they win big.

If the bankers make huge bets and they lose, then the federal government uses taxpayer money to clean up the mess.

Under those kind of conditions, why not bet the farm?

Sadly, most Americans do not even know what derivatives are.

Most Americans have no idea that we are rapidly approaching a horrific derivatives crisis that is going to make 2008 look like a Sunday picnic.

According to the Comptroller of the Currency, the "too big to fail" banks have exposure to derivatives that is absolutely mind blowing. Just check out the following numbers from an official U.S. government report....

JPMorgan Chase - $70.1 Trillion

Citibank - $52.1 Trillion

Bank of America - $50.1 Trillion

Goldman Sachs - $44.2 Trillion

So a 2 billion dollar loss for JP Morgan is nothing compared to their total exposure of over 70 trillion dollars.

Overall, the 9 largest U.S. banks have a total of more than 200 trillion dollars of exposure to derivatives. That is approximately 3 times the size of the entire global economy.

It is hard for the average person on the street to begin to comprehend how immense this derivatives bubble is.

So let's not make too much out of this 2 billion dollar loss by JP Morgan.

This is just chicken feed.

This is just a preview of coming attractions.

Soon enough the real problems with derivatives will begin, and when that happens it will shake the entire global financial system to the core.

May 14, 2012

What Was Not Said During Jamie Dimon's Media PR Campaign

Today's Meet The Press PR damage control campaign orchestrated on behalf of Jamie Dimon by the fawning press was just another attempt at redirection, in which a faux contrite Jamie Dimon promises that as a result of being '100% wrong' about his prior "Tempest in a Teapot" description of the Bruno Iksil debacle, he has learned his lesson, and in tried and true American fashion deserves a second chance. The rest was filler. What was not said is that the entire business model of the modern US banking edifice, where due to the Net Interest Margin limitations imposed by ZIRP, is one of prop trading as being a glorified hedge fund is the only way the banks can generate a rate of return above their cost of capital.

•What was also not said was the glaring lies by Blythe Masters from a month ago who swore up and down to CNBC that JPM does not engage in prop trading: "We have offsetting positions. We have no stake in whether prices rise or decline"

•What was also not said is that contrary to "conventional wisdom" where a few prop traders have been sacked (most likely due to not taking enough risk) prop trading is alive and well across Wall Street, even if it has been largely rebranded as 'flow trading' - just as the high freaks are scrambling to come up with a new name for HFT because that will make all the difference.

•What was also not said, nor discussed, is why anyone would trust or invest in these money center banks when their balance sheets are so opaque, even their apparently clueless CEOs flip-flop within a month on what is really happening, with accounting standards so poor, that nobody can figure out what they are investing in, and why Mark-to-Market is still halted (Aren't banks finally quote unquote healthy?).

•Finally, the most important thing not said, was Glass-Steagall, the one law whose overturning allowed the commingling of deposits and hedge fund activity courtesy of Gramm-Leach-Bliley, hilarious called the Financial Services Modernization Act of 1999.

If America is to have even a remote hope of returning to normalcy, Glass-Steagall has to be reinstated. Which is why nobody brought it up on MTP: neither the anchor who is accountable to an organization which needs the status quo for advertising revenues, nor the hungry for TV exposure senator, nor the DCF-expert access journalist. Nobody.

Luckily America's population - at least the part which realizes that nothing has changed for the better, and that fundamentally things have continued deteriorating, especially when removing the central planners' crutches - is becoming increasingly more educated and realizes just how much it is being lied to by prominent bankers, on prime time TV, in a process that further destroys any residual credibility of the status quo. And for those curious what happens when the last ounce of faith in a failing system disappears, we have one word: Europe.