by Tyler Durden
Whenever the annual change in core capex, also known as Non-Defense Capital Goods excluding Aircraft shipments goes negative, the US has traditionally entered a recession. Where is this number now: +0.8%, and declining fast. Feeling lucky?
Of course, in no other previous recession, was the US Fed holding $3.5 trillion in securities and increasing at a pace of $85 billion per month.
Source: Dept of Commerce
Heads should roll. Don’t bet on it.
He also was one of legions of corrupt politicians as US senator and New Jersey governor. His extreme, longstanding criminality warrants putting him in prison for life. No restitution can reverse his harm. It’s true also for many others like him.
Before its collapse, MF Global (MFG) faced a run on its holdings. On October 31, it filed for Chapter 11 bankruptcy protection.
On November 19, Reuters said the firm “moved hundreds of millions of dollars in customer money from its US brokerage unit to Bank of New York Mellon Corp. in August, just months before filing for bankruptcy….”
In other words, MFG lawlessly looted customer accounts. It used client money for its own purposes to speculate, as well as cover debt obligations and losses. At issue is grand theft.
In fact, it’s one of the most brazen acts in memory in a business notorious for outrageous criminality. What ever’s gotten away with incentivizes Wall Street crooks to steal more. Why not! At most, they’re slap on the wrist punishments mock rule of law justice.
On November 19 on the Kaiser Report, Barry Ritholtz commented on the big lie, hyper-leveraged banks, the MFG scandal, and congressional political whores, saying:
People responsible for creating these problems shift blame to others. Facts say otherwise. Wall Street speculators take big risks. They use hyper-leverage that’s only effective when it works.
“Their models were wildly optimistic. Banking is supposed to be very boring.” Decisions are supposed to be made about who’s credit worthy and who isn’t. Instead, reckless speculation replaced investing and sound lending policies.
Wall Street’s ideology is bankrupt, “and it’s causing global damage to the economy. For investment banks, the five biggest houses got waivers on leverage rules.”
SEC collaborators rigged the system for them. These banks also “happen to be the five biggest donors to Congress,” or among the largest. Over time, successful lobbying removed everything affecting profits, no matter the risk. The SEC, Fed, FDIC and CME rigged the system for them.
Brazen fraud became standard practice. Criminals deserving prison keep stealing. The dirty game involves grabbing “whatever the hell you want and run for the hills. No one will prosecute you.”
“MF Global is another order of magnitude. If anyone is going to jail over this whole period, it has to be” their top officials. Don’t bet on it, especially a power broker like Corzine.
He’s directly responsible for stealing $1.2 billion in client funds. He looted them brazenly. According to Bloomberg:
“Examiners from CME Group Inc., the world’s largest futures exchange, found unexplained wire transfers” and $1.2 billion “during the weekend the failing broker was talking with possible buyers, a person briefed on the matter said.”
Multiple investigations began, including by Justice Department lawyers. The Commodity Futures Trading Commission (CFTC) and Chicago Mercantile Exchange (CME) were responsible for overseeing MFG. They knew what went on but did nothing.
Huffington Post writer Daniel Dicker said the Koch Brothers were tipped off in time to get out safely. Others weren’t as lucky.
MFG is America’s eighth largest bankruptcy, the first major one the Eurozone crisis caused. Expect more ahead.
Practices cratering economies in 2008 continue. Nations teeter on bankruptcy. Corzine bet heavily that Spanish and Italian debt wouldn’t collapse.
Using 40 to 1 leverage, he bet massively the wrong way. His second quarter $190 million loss drove investors away. Those remaining lost everything. Corzine and top executives pocketed millions.
In 1999, he was worth an estimated $400 million when he left Goldman Sachs. Perhaps its double that now, including funds looted from MFG. We may know more later on.
From 1994 – 1994, Corzine headed Goldman Sachs during the time banking became deregulated. Carter began it late in his tenure. Reagan did much more. Clinton completed unfinished business. James Petras calls the 1990s “the golden age of pillage,” the decade of anything goes.
It persists in the new millennium because political Washington and regulators look the other way, profiting handsomely by doing it. Everyone feathers nests belonging to others. Self-sustaining corruption continues. Only little people and unknowing investors get scammed. Power brokers make out like bandits.
After losing his 2009 gubernatorial reelection bid, government regulators welcomed Corzine back on Wall Street. New York Fed president William Dudley (a fellow Goldman alumnus) made MFG a “primary dealer.” Despite its size and a former trading scandal $10 million fine, it became one of a handful of firms marketing US Treasuries.
At the behest of Corzine and other power brokers, CFTC head Gary Gensler suspended implementation of new rules imposing limits on broker-dealer use of client funds, especially for foreign sovereign debt. In other words, they were freed to commit grand theft. MFG took full advantage.
Wall Street Journal Money & Investing editor Francesco Guerrera wrote about “Three Lessons From the Collapse.” He quoted University of San Diego Professor Frank Partnoy, saying:
MFG’s “failure illustrates how much financial markets are about trust and confidence. Once you lose those, you are done.”
Guerrera’s three lessons include:
- closing accounting loopholes and strengthening oversight;
- establishing lead regulators for nonbank financial firms; and
- writing new rules for “nonsystemic” firms as well as “too big to fail” ones.
Dodd-Frank financial reform left a broken system in place. The entire law needs rewriting. Better still, scrap it and start over. Stiff regulations with teeth are needed, including mandatory prosecution of crooks, especially those highest up to let others know invulnerability days are over.
When culpable CEO heads roll, it’ll be a good start. However, game-changer differences won’t happen until all high level Wall Street swindlers wear numbered striped suits.
Trends forecaster Gerald Celente lost $100,000 in an MF Global gold futures account. He told Russia Today:
“I really got burned. I got a call,” saying “I needed to have a margin call. (W)hat are you talking about,” he asked? “I’ve got a ton of money in my account. They responded, oh no you don’t. That money’s with a trustee now.”
His advice for everyone holding gold ETFs is cash out because “they are going to steal all our money.” Angry about MF Global’s theft, he called Corzine a “cheap SOB.” He’s that and much more.
“How come he’s not in Jail,” railed Celente. It’s “because he’s one of the white shoe boys from the Goldman Sachs crowd.” He added that “the merger of state and corporate power” brought “fascism” to America.
The entire system’s too corrupted to fix. Only tearing it down and starting over can work. It’s high time the process started. Hopefully, OWS protests began it.
Rumor has it that JPMorgan Chase and perhaps other Wall Street banks are involved. Judge Martin Glenn is handling MFG’s bankruptcy. HL Camp, Proprietor of HL Camp Futures , wrote him as follows:
“Our firm is a registered introducing broker with the CFTC. I have written to you previously on behalf of our customers.”
“Here is a comment this morning from one of our former customers in Europe,” saying:
“I will never do business in the United States of America again.”
According to Camp, “(t)he system is to protect futures accounts is broken. And the whole world knows it.”
“What started as a failure of one FCM (Futures Commission Merchant) that quickly gave a black eye to the CFTC and especially the CME has now made our United States of America a very bad joke to commodity futures traders all over the world.”
“The problem this morning is not just excess margin equity.”
“The problem this morning is the reputation of the United States of America.”
“Thank you very much for your time and for listening.”
Forbes staff writer Robert Lenzner said traders and clients didn’t know about MFG’s unscrupulousness. He said a CFTC loophole lets firms speculate with segregated client accounts. Few know it without carefully reading contract fine print or getting sound legal advice.
Lenzner’s lesson one is CFTC Rule 1.29 must be scraped. It lets futures commission merchants gamble with client funds.
Lesson two is knowing personal funds aren’t safe in futures metals, energy, precious metals, or agricultural
Lesson three is resolving which regulator oversees firms like MFG – the CFTC or CME. One should have primary responsibility and be held accountable for fraud.
Lenzner added that Justice Department attorneys are determining whether federal crimes occurred. He expects a lengthy process because MFG’s books “are in a state of chaos,” deliberately no doubt.
Whether anyone ends up indicted isn’t sure. At most perhaps, expect lower level patsies hung out to dry to let crime bosses like Corzine stay free to steal more. It’s how it always works.
- MF Global trustee doubles estimates of shortfall (mb50.wordpress.com)
- MF Global Revelations Keep Getting Worse (mb50.wordpress.com)
- Janet Tavakoli: MF Global Revelations Keep Getting Worse (huffingtonpost.com)
- MF Global may be missing $1.2-billion (business.financialpost.com)
By Harald Uhlig
Oct. 21 (Bloomberg) — The euro area is burning and policy makers seem increasingly powerless to douse the flames. Meanwhile, we can only stand by and watch this nerve-wracking spectacle.
Yet the situation may not be utterly hopeless. In the last month or so, researchers have floated proposals for the creation of synthetic euro bonds that may offer a way out. The idea rests on three principles: No cross-subsidization between countries; safety; and the replacement of risky sovereign debt by synthetic bonds in European Central Bank repurchases.
I know what you are thinking: Are these people out of their minds? Collateralized debt obligations? Synthetic securities? That is what got us into this mess in the first place.
Let’s take a closer look. The proposals all start with some version of an open-ended mutual fund that would hold euro-area bonds. Ideally, the fund would hold these assets in proportion to the gross domestic product of each member country. It would then issue certificates that would be fully backed by these bonds. If there is a partial or full default on one of the securities (Greek 10-year bonds, say), then the mutual-fund certificates would lose some value.
In the case of a small country or a partial default, the losses would be small. So, the certificates would be reasonably safe.
The most important aspect, however, is that there would no mutual bailout guarantees, no cross-subsidization between countries and no need for high-level political brinkmanship. This is the core of the proposal I put forth with my colleagues Thorsten Beck and Wolf Wagner, of Tilburg University in the Netherlands.
We recognize that many people will say that reasonably safe isn’t safe enough when it comes to synthetic securities. We believe they could be made safer. Markus Brunnermeier and his fellow members of the Euro-nomics group propose to divide the mutual-fund certificates into tranches. The junior tranche would be hit first in case of a default. The senior tranche would be most protected and could be called “European safe bonds” or “ESBies.” Both tranches would be traded on markets.
This would slice a slightly risky investment into several parts, one of which is safe. It would be an important feature if the ECB can’t be persuaded to use the raw mutual-fund certificates directly for repurchasing transactions, or if the original certificates are still considered too risky on bank balance sheets.
The biggest disadvantage of this idea is that it is too reminiscent of the infamous alchemy of 2008. I think it can work if properly implemented.
Another proposal by two Italian economists, Angelo Baglioni and Umberto Cherubini would create the original mutual fund, but it would only buy senior debt from governments, which would be required to post cash collateral. That is less appealing because it would require too much political maneuvering, would too easily allow cross-subsidization, and would entail restructuring of current government debt to create securities of appropriate seniority.
But the main point is this: It would be feasible to fine- tune any proposal to ease particular concerns of participants regarding seniority and safety, as long as the three principles I outlined above are obeyed.
The last of the three principles may be the most critical: These certificates must replace risky sovereign debt in ECB repurchasing transactions. One objection to this is that there is no particular reason now, for, say, a Greek bank to hold Greek debt or for a Spanish bank to hold Spanish debt, when they could all hold much safer German bonds.
‘Hold to Maturity’
The banks that can still afford to mark their sovereign debt to market, rather than “hold to maturity” and pretend all is well, can do this now. They can ensure their safety by selling the debt of Portugal, Ireland, Italy, Greece and Spain, and buying German bonds.
The trouble with that scenario is that if all banks were to act this way, the prices of those bonds might plummet. That would mean far deeper trouble for Portugal, Ireland, Italy, Greece and Spain the next time they try to issue new debt. It would cause problems for the banks, too, as they would get even less than what they currently think the bonds are worth.
The ECB has danced around this issue by repurchasing risky sovereign debt, buying it outright in the open market, supporting these prices through intervention, and trying to unwind again. The ECB is ultimately backed by the euro area’s taxpayers, who either get more inflation or a depreciation of their currency, if things turn south.
In addition, the central bank’s actions have had the unintended effect of encouraging private banks to hold the risky assets, rather than discouraging them from doing so. This makes sense: These bonds get higher returns, are still usable as collateral with the ECB, and are implicitly guaranteed by government bailouts if things go wrong. The real loser is the taxpayer.
The mutual-fund construction removes much of this moral hazard. It can buy a sizeable fraction of the risky debt, taking it off the books of the ECB and the commercial banks. Yes, it may still need to buy German, Dutch and Finnish bonds on the market, but the banks, in turn, would buy these certificates. And, importantly, the ECB uses the mutual-fund certificates or their ESB-safe versions for its repo- and open-market transactions, while gradually phasing out its support of individual risky sovereign debt.
Who can create these certificates? A savvy market participant could probably pull this off in a few days. But it would be better to have a public institution do it instead. Competition among several such funds may even be better, with the ECB deciding which ones to accept and which ones to phase out. In any case, this can be done quickly, if decision makers in government and the financial-market institutions can be persuaded to act.
This isn’t a glamorous, magic solution. Nor is it a sexy proposal for politicians to sell in speeches. This is a simple step forward that wouldn’t cost much, but is easy and effective. Most of all, it is what the euro area needs right now.
(Harald Uhlig is chairman of the economics department at the University of Chicago and a contributor to Business Class. The opinions expressed are his own.)
- The Eurozone Crisis For Dummies (businessinsider.com)
- Franco-German deadlock over ECB’s role in rescue fund (jhaines6.wordpress.com)
- Italy Picks Surprise Central Bank Chief (online.wsj.com)
- EU Said to Consider Wielding $1.3 Trillion to Break Impasse (businessweek.com)