The day before the 4th of July, when most Americans were hustling about preparing for family barbecues, the New York Times finally decided to publish an editorial warning about Wall Street’s potential threat to the nation. Unfortunately, it did so with the kind of timidity we see regularly from cowed or compromised Wall Street banking regulators. The editorial writers noted that: ‘It’s entirely possible that the system is more fragile than the Fed’s stress tests indicate,’ and they called for ‘heightened vigilance of derivatives in particular’ without providing any detailed data. A more accurate assessment of the situation would have been this: There is only one industry in the United States that has twice in a period of less than 100 years brought about a devastating economic crisis in the country. Wild speculation coupled with poor regulation of mega Wall Street banks brought about the Great Depression in the 1930s, leading to massive job losses, bank failures, poverty and economic misery for tens of millions of innocent Americans. The precise same combination of wild speculation and crony regulators created the Wall Street crash of 2008, throwing millions of Americans into unemployment and foreclosure while creating obscene bailouts and bonuses for bankers, and leaving the U. S. with such a low economic growth rate to this day that many Americans feel they are still living in the Great Recession.
We have frequently called out the New York Times for running sycophantic articles on the big, mean, untamed Wall Street banking behemoths which just happen to be one of its home town’s largest industries and source of the biggest paychecks, which, in turn, boost its real estate markets, restaurants and retail sales – not to mention its own ad revenues. According to the Federal government’s Bureau of Labor Statistics, financial activities represented 468,600 jobs in New York City as of April 2017. According to a report from the New York State Department of Labor on New York City’s largest industries, as of 2014 the ‘average annual wage ($404,800) paid in the securities and commodity contracts industry is nearly five times the all-industry average annual wage ($84,752) for 2014.’ But today, the New York Times’ Editorial Board has joined Wall Street On Parade in expressing skepticism about the Federal Reserve giving a green light on the stress tests for 34 banks last week. After sounding the alarm about the Trump administration’s plans to roll back Obama-era reforms of Wall Street, the New York Times editorial raises the following concerns: ‘It’s entirely possible that the system is more fragile than the Fed’s stress tests indicate. By the Fed’s calculations, capital held by the nation’s eight largest banks was nearly 14 percent of assets, weighted by risk, at the end of 2016. ‘Alternative calculations of capital, including those that use international accounting rules rather than American accounting principles, put the capital cushion much lower, at 6.3 percent. The difference is largely attributable to regulators’ differing assessment of the risks posed by derivatives, the complex instruments that blew up in the financial crisis and that still are a major part of the holdings of big American banks.
Debt is serfdom, capital in all its forms is freedom. If we accept that our financial system is nothing but a wealth-transfer mechanism from the productive elements of our economy to parasitic, neofeudal rentier-cartels and self-serving state fiefdoms, that raises a question: what do we do about it? The typical answer seems to be: deny it, ignore it, get distracted by carefully choreographed culture wars or shrug fatalistically and put one’s shoulder to the debt-serf grindstone. There is another response, one that very few pursue: fanatic frugality in service of financial-political independence. Debt-serfs and dependents of the state have no effective political power, as noted yesterday in It Isn’t What You Earn and Owe, It’s What You Own That Generates Income. There are only three ways to accumulate productive capital/assets: marry someone with money, inherit money or accumulate capital/savings and invest it in productive assets. (We’ll leave out lobbying the Federal government for a fat contract or tax break, selling derivatives designed to default and the rest of the criminal financial skims and scams used so effectively by the New Nobility financial elites.)
Goldman’s former President and COO, who was recently picked to be Trump’s chief economic advisor as head of the National Economic Council, will recuse himself from any matters directly involving his former employer, the White House told the Financial Times. The topic emerged when the FT learned that the former “#2” at Goldman was spearheading Goldman’s lobbying at the US derivatives regulator on rules prompted by the role swaps contracts played in the 2008 financial crisis. As president of Goldman Sachs, Cohn attended four meetings in 2015 and 2016 with top officials at the CFTC to discuss the swaps rules mandated by the sweeping Dodd-Frank reforms, according to meeting records. As the FT adds, Cohn’s most recent CFTC meeting as a Goldman representative was on February 19 2016, according to the records. On the same day Trump was campaigning in South Carolina, where he mocked Ted Cruz and Hillary Clinton by saying Goldman Sachs had ‘total control’ over them. He ended his campaign by airing an anti-Wall Street ad that displayed an image of Goldman chief executive Lloyd Blankfein as Mr Trump talked of ‘a global power structure that is responsible for the economic decisions that have robbed our working class’.
This post was published at Zero Hedge on Feb 23, 2017.
It’s more than a coincidence that at a time when the two leading candidates for the highest office in the United States are considered untrustworthy by tens of millions of their fellow citizens, the industry that has perpetually attempted to stack the political deck in Washington has also lost the trust of a majority of Americans. This feels to many like having Wall Street’s one percent at the rudder for the past two decades has finally steered the ship of state into a toxic sink hole that is devouring the credibility of the United States at home and abroad. Wall Street’s image has fallen so low that the Federal Reserve Bank of New York is holding an annual ‘Reforming Culture and Behavior in the Financial Services Industry’ conference. That New York Fed President Bill Dudley is heading up this conference shows just how hopelessly lost Wall Street really is. (Dudley is the guy who didn’t see a problem with his wife collecting $190,000 annually from JPMorgan Chase while Dudley supervised the bank. The New York Fed is also the place that allowed JPMorgan CEO Jamie Dimon to continue to sit on its Board as JPMorgan was being investigated by the Fed for losing over $6 billion in depositors’ money in the London Whale derivatives fiasco. And Dudley is also the guy that allowed the firing of one of his own bank examiners, Carmen Segarra, after she filed a negative examination of Goldman Sachs. Segarra filed a Federal lawsuit charging that she was fired in retaliation for refusing to change her examination report. The portrait of the New York Fed as a crony regulator under Dudley was dramatically broadened in 2014 when ProPublica and public radio’s This American Life released internal tape recordings Segarra had made inside the New York Fed showing a lap dog regulator cowering before a powerful Wall Street firm.)
It is never a good thing when official sources either named or unnamed are quoted in the media as denying bailout discussions. For any bank such rumors and denials are harmful because, obviously, they are a reflection of common perception. Furthermore, most people know all-too-well the true nature of any denials, thus reinforcing only that much more the troubling perceptions in the first place. For Deutsche Bank to be the institution in question is altogether different. When Germany’s Commerzbank, for example, was forced to request a capital injection from the state’s bailout fund SOFFIN in November 2008 that was a sign of the times. It was just another bad sign in an ocean of them. Should Deutsche Bank even get connected to something like that is perhaps a sign of renewal of those times. Deutsche Bank is not Commerzbank; in many ways Deutsche is the last remaining remnant of what is left of the reigning wholesale, eurodollar system. Where other banks long ago saw this depression for what it was (all risk, no reward), DB was siding with central bankers and deploying ‘capital’into EM’s and junk bonds. The bank was reticent to reject its derivatives book, once a source of nearly all its power and strength. And it was dreams of reclaiming lost grandeur that drove the bank into its currently perilous state. When the firm first announced estimates for its coming loss in October last year, I wrote:
Over the past week Rasmussen polls have captured the epic disgust of voters in the direction America is heading. Only 31 percent of likely voters believe the country is heading in the right direction;67 percent of voters are angry at the current policies of the federal government; and just 24 percent trust the federal government to do the right thing most or nearly all the time. The smooth functioning of the U. S. economy is based on citizens having confidence in the country’s leaders. Over two-thirds of the U. S. economy stems from consumer spending. When consumers lack confidence, they scale back spending. When businesses lack confidence, they lay off workers or stop hiring. When new home buyers lack confidence, they postpone signing a contract. Last Friday, Bloomberg News reported that the CEO of Signet Jewelers Ltd., Mark Light, was blaming a slowdown in diamond wedding ring sales on ‘a presidential campaign season that has scared couples into closing their checkbooks.’ No Federal agency has done more to drain investor and consumer confidence than the crony Securities and Exchange Commission. Public revulsion of the SEC has now reached such epic proportions that a whistleblower, Eric Ben-Artzi, has turned down his half of a $16.5 million whistleblower award from the SEC for alerting the agency that his former employer, Deutsche Bank, had been inflating the value of its credit derivatives to avoid taking losses. The SEC imposed a $55 million fine on the bank but took no further actions against the employees who were responsible for misspricing the derivatives and hiding the losses.
The stock market went haywire about a year ago. The Dow crashed more than 1,000 points, the S&P 500 was down 120 points, and the Nasdaq was down 393 points shortly after the market open on August 24. And for a time, the blame for the sudden and unexplained move was a group of funds called risk parity fund. Risk parity funds build portfolios around risks: They target a certain exposure to volatility, rather than, say, equities or bonds. That means that when volatility spikes, they sell automatically and indiscriminately. That’s why they were in the spotlight back in August 2015. The complaint was that the sudden rise in the stock-market volatility forced them to sell, increasing volatility further. Well, everyone should be paying close attention to these funds again, according to Bank of America Merrill Lynch. The equity derivatives strategy team at the US bank put out a note on August 9 that is full of technical language, but boils down to this: There are risks building up in the risk parity world. From the note:
Having closely observed how Citigroup collapsed under the weight of its own corruption and risk-taking hubris in 2008 and spread its contagion across Wall Street, a headline we never dreamed we would see in our lifetime is shown above from Risk Magazine’s web site. The article under the heart-stopping headline is dated January 27, 2016 and informs readers that Citigroup is now viewed by clients as one of the top-three market makers in single name Credit Default Swaps in both North America and Europe. Credit Default Swaps are the instruments that blew up the giant insurance company, AIG, in 2008, requiring the U. S. government to bail out the company to the tune of $185 billion. The bailout money went in the front door of AIG and was then funneled out the backdoor to the big Wall Street banks that had used AIG as their counterparty to guarantee their bets on Credit Default Swaps. The AIG bailout was effectively a backdoor bailout of the biggest banks on Wall Street. Credit Default Swaps also played a role in Citigroup’s implosion in 2008, which necessitated the following government bailout: $45 billion in equity infusions; over $300 billion in asset guarantees; and more than $2 trillion in cumulative, below-market-rate loans from the Federal Reserve. Citigroup, then and now, holds insured savings deposits while at the same time engaging in high risk trading at both its investment bank and commercial bank.
Donald Trump can instantly get to the left of Hillary with respect to Wall Street and the one percenters by embracing Super Glass-Steagall. The latter would cap U. S. banks at $180 billion in assets (<1% of GDP) if they wished to have access to the Fed’s discount window and have their deposits backed by FDIC insurance. Such Federally privileged institutions would also be prohibited from engaging in trading, underwriting, investment banking, private equity, hedge funds, derivatives and other activities outside of deposit taking and lending. Instead, these latter inherently risky economic functions would be performed on the free market by at-risk banks and financial services companies. The latter could never get too big to fail or to manage because the market would stop them first or they would be disciplined by the fail-safe institution of bankruptcy. No taxpayer would ever be put in harms’ way of trades like those of the London Whale. By embracing this kind of Super Glass-Steagall Trump would consolidate his base in the flyover zones and reel in some of the Bernie Sanders throng, too. The latter will never forgive Clinton for her Goldman Sachs speech whoring. And that’s to say nothing of her full-throated support for the 2008 bank bailouts and the Fed’s subsequent giant gifts of QE and ZIRP to the Wall Street gamblers. Besides, breaking up the big banks and putting Wall Street back on a free market based level playing field is the right thing to do. Today’s multi-trillion banks are simply not free enterprise institutions entitled to be let alone. Instead, they are wards of the state dependent upon its subsidies, safety nets, regulatory protections and legal privileges. Consequently, they have gotten far larger, more risky and dangerous to society than could ever happen in an honest, disciplined market.
The risk of a default chain reaction is looming over the $3.6 trillion market for wealth management products in China. WMPs, which traditionally funneled money from Chinese individuals into assets from corporate bonds to stocks and derivatives, are now increasingly investing in each other. Such holdings may have swelled to as much as 2.6 trillion yuan ($396 billion) last year, based on estimates from Autonomous Research this month. The trend has China watchers worried. For starters, it means that bad investments by one WMP could infect others, causing a loss of confidence in products that play an important role in bank funding. It also suggests WMPs are struggling to find enough good assets to meet their return targets. In the event of widespread losses, cross-ownership will create more uncertainty over who’s vulnerable – a key source of panic in 2008 when soured U. S. mortgage securities triggered a global financial crisis. Those concerns have become more pressing this year after at least 10 Chinese companies defaulted on onshore bonds, the Shanghai Composite Index sank 20 percent and China’s economy showed few signs of recovery from the weakest expansion in a quarter century. ‘There’s abundant liquidity in the financial system, but a scarcity of high-yielding assets to invest in,’ said Harrison Hu, the chief Greater China economist at Royal Bank of Scotland Plc in Singapore. ‘All the risks are accumulating in an overcrowded financial system.’
When Erika Cajic woke before dawn one morning in early May and read that wildfires were breaking out in an oil-producing region of Alberta, she sat down on the family room couch with a cup of hot chocolate and her laptop and bought shares of an investment linked to crude. The 45-year-old full-time parent of two in Mississauga, Ontario, like many investors, reasoned that the production outages would drive up the price of oil. By buying the VelocityShares 3x Long Crude Oil UWTI -0.73 % exchange-traded note, she tripled down on her hunch, as the product uses derivatives that aim to rise and fall at triple the daily change in oil. Within about four days, she estimated she made about 500 Canadian dollars (US$384) on those trades after converting from U. S. dollars. ‘The swings are gigantic lately,’ she said of the product, known by its ticker UWTI, and the other energy products she has traded in recent months. For some individual investors, crude is the new hot trade. Oil in the U. S. fell to its lowest level since 2003 in February but has surged roughly 90% since then. On Thursday, it traded above $50 a barrel for the first time since October. That compares with a stock market that has offered nowhere near that momentum. ‘I just thought, let’s throw a couple of hundred dollars in it…and try it out,’ said Matt Krasnoff, 26, of New York, who bought shares of UWTI last year after hearing about it from a friend. ‘I just enjoy the risk and the thrill of the market in general.’
A group of hedge funds, convinced they have found the next Big Short, are looking to bet against bonds backed by subprime auto loans. Good luck finding a bank willing to do the trade. Subprime Loans Money managers have looked at betting that subprime auto securities will tank for many of the same reasons that investors wagered against risky mortgage bonds in the run-up to the financial crisis: Loan volume has mushroomed in the last few years, lending terms have become looser and delinquencies are ticking higher. Mary Kane, an asset-backed securities analyst at Citigroup Inc., wrote in a note late last month that the bank has received ‘an explosion of calls’ in recent weeks, after the movie ‘The Big Short’ portrayed a group of traders that profited from the collapse of subprime home loans. The demand now is coming from hedge funds that trade everything from stocks to bonds, analysts said. But many banks, including Bank of America Corp. and Morgan Stanley, are not interested in making the bet happen for clients, according to representatives of the firms. Some said they fear that helping clients wager against car loans would be bad for their reputation, and that new capital rules and other post-crisis regulations would make the transactions difficult or even impossible to put together. ‘Most trading desks just don’t take that kind of risk now,’ said Mike Edman, a former Morgan Stanley executive who helped invent credit derivatives that helped Wall Street banks bet against subprime mortgage bonds.
If Bank of America Corp. is right, Chinese stocks in Hong Kong are poised for a fresh wave of selling. That’s because the benchmark Hang Seng China Enterprises Index is trading at a level that forces investment banks to pare back their bullish futures positions, according to William Chan, the head of Asia Pacific equity derivatives research at BofA’s Merrill Lynch unit in Hong Kong. The trades, tied to banks’ issuance of structured products, are likely to start unwinding when the index falls through 8,000, a level it breached on a closing basis Thursday for the first time since 2009. Banks have purchased futures on the gauge of so-called H shares to hedge exposure to structured products that they’ve sold to clients, according to Chan. Many of those products have a ‘knock-in’ feature at the 8,000 level that will spur banks to cut futures positions to maintain the effectiveness of their hedges, he said. Additional pressure points may also come at lower levels, Chan said.
If you are a victim of investment fraud, there may be implications for your federal taxes. Visit for details. — CFTC (@CFTC) January 19, 2016
As regular readers are likely aware, we like to give the CFTC a helping hand whenever possible. For seven years, we’ve warned about the danger the market faces from the parasitic ‘strategies’ of predatory HFTs and nefarious vacuum tubes and finally, the Commission as well as the DOJ listened, subsequently confirming that such practices are indeed illegal. So concerned is the CFTC about rooting out any and all corruption and market manipulation that the Commission conducted an extensive investigation into the cause of 2010′s infamous flash crash on the way to uncovering the ‘mastermind’ behind the madness that sent the Dow plunging nearly 1,000 points in minutes. So impressed were we at the Commission’s dedication to preserving the integrity of our beloved ‘markets’ that we sought last year to help the CFTC uncover further instances of manipulation in a series of articles (see here, here, and here) designed to help hapless regulators spot the very same type of tactics they swear Navinder Sarao used on the way to engineering the collapse of the entire US equity market from his basement. Of course we jest and to the extent we believed there might be a shred of honesty and/or dignity buried somewhere in the bowels of the government body tasked with policing the derivatives market, our hopes were dashed on Tuesday when we learned that the Commission’s auditor has withdrawn ‘nearly a decade’ of financial opinions after discovering that the books may be cooked.
This post was published at Zero Hedge on 01/20/2016.
They finally did it – 25 bps, for the first rate increase since 2004. Surely it’s the most dovish Fed ‘tightening’ ever. Indeed, it was really no tightening at all. One has to go all the way back to 1994 for the last time the Federal Reserve commenced a true tightening cycle. That episode proved so destabilizing that the Federal Reserve assured the markets that they’d learned their lesson. And this (dovish and market-pandering) mindset was fundamental to the little baby step rate increases that ensured no tightening of financial conditions throughout the historic 2002-2007 mortgage finance Bubble inflation. This week’s policy move will be debated for years to come. Lost in the debate is how the Fed (along with global central bankers) found itself stuck at zero for seven years (with a $4.5 TN balance sheet) and then saw it necessary to move to raise rates in the most gingerly, market-pleasing approach imaginable. Traditionally, tightening cycles are necessary to counter mounting excess, including ill-advised lending, speculating and investing. Rate increases back in 1994 exposed what had been a dangerous expansion in speculative leveraging, derivatives and market-based Credit (at home and abroad). With the ‘bond’ market in disarray and Mexico at the precipice, the Greenspan Fed turned its attention to bolstering the markets and non-bank Credit more generally. Market-based Credit is unstable. This remains the fundamental issue – the harsh reality – that no one dares confront. I would strongly argue that long-term stability in a Capitalistic system requires sound money and Credit (hopelessly archaic, I admit). Over the years, I’ve tried to differentiate traditional finance from unfettered ‘New Age’ finance. The former, bank lending-dominated Credit, was generally contained by various mechanisms (including the gold standard, effective currency regimes, bank capital and reserve requirements, etc.). This is in stark contrast to the current-day securities market-based global financial ‘system’ uniquely operating without restraints on either the quantity or quality of Credit created. A few data points from the Federal Reserve’s ‘Z.1′ report illuminate why the Credit system had turned fragile back in 1994. After beginning the decade at $6.39 TN, Total Debt Securities (my compilation of Treasuries, Agency Securities, Corporate Bonds and Muni Debt) surged $2.94 TN, or 46%, in four years to end 1993 at $9.33 TN. For comparison, over this period bank (‘Private Depository Institutions’) Loans actually declined $169 billion (Total bank Assets rose $137bn to $4.9 TN). Importantly, Total Debt Securities as a percentage of GDP jumped from 113% to 135% in four years, while bank Loans to GDP declined from 57% to 44% (bank Assets 84% to 71%).
For more than a year, dealers in the U. S. equity derivatives market have noted a widening gap in the price of certain options. If you want to buy a put to protect against losses in the Standard & Poor’s 500 Index, often you’ll pay twice as much as you would for a bullish call betting on gains. New research suggests the divergence is a consequence of financial institutions hoarding insurance against declines in stocks. The pricing anomaly is visible in a value known as skew that measures how much it costs to buy bearish options relative to those that appreciate when shares rise. In 2015, contracts betting on a 10 percent S&P 500 decline by February have traded at prices averaging 110 percent more than their bullish counterparts. That compares with a mean premium of 68 percent since the start of 2005, according to data compiled by Bloomberg.
While some are shocked that China may have ‘used’ a huge amount of ‘reserves’ in November, that is only because so many myths and anachronisms continue to abound in the mainstream and beyond. Any conversation about forex in the context of central banks and national government agencies is one that still views money from a traditional standpoint – as if these places have piles of currency sitting in a vault or in some kind of standard deposit account. Even where securities are recognized as the mainstay of that accumulation, it still seems to reckon some kind of sentimentalist pursuit. For one, we have no idea to what China’s ‘reserves’ actually belong; they don’t report much information and what we do have on this end is often quite incomplete. The TIC figures, for example, which show China’s domestic holdings in one sense don’t align with the dramatic swings in Belgium. Belgium is notable for many reasons but particularly the home location of Euroclear which is Europe’s primary derivatives clearinghouse (eurodollar primary among the ‘products’ offered such clearing). Thus, if China’s holdings of UST’s diminish in Belgium then it isn’t at all obvious that they are ‘selling UST’s’; in fact, contrarily, it is far more likely that they are posting collateral for forward transactions, swaps and the like.
China’s biggest clampdown on malpractices in its securities industry kicked into higher gear this week with news that three of the nation’s largest brokerages are being investigated for alleged rule violations. Citic Securities Co. and Guosen Securities Co. late Thursday announced probes by the securities regulator and Haitong Securities Co. confirmed Friday it was under investigation. Brokerage shares slumped and the Shanghai Composite Index fell 5.5 percent, the most since the depths of a summer stock rout. The crackdown since the sell-off has ensnared executives and regulators, with restrictions imposed on short selling and the regulator on Fridayconfirming a ban on brokerages offering derivatives financing for stock trading. Adding to signs of upheaval, a Hong Kong-listed unit of a Chinese brokerage said this week that it had lost contact with its chief executive officer. An initial hunt for culprits for China’s market slump appears to have evolved into a broader clean-up, said Paul Gillis, a professor at the Guanghua School of Management at Peking University. ‘It’s an important step in reforming capital markets to make sure that powerful insiders don’t have their fingers on the scale,’ Gillis said from Beijing on Friday. ‘The markets need to be fair in order to operate efficiently.’ Biggest Decline The Bloomberg Intelligence China H-Share Institutional Brokerage index, which tracks seven Chinese brokerages listed in Hong Kong, slumped 4.9 percent on Friday after the latest announcements of probes, the biggest decline in three months.
Collapsing fundamental economics Plunging end-user demand for its products Overloaded with debt Hidden land-mines in the form of OTC derivatives Who said ‘black swans’ have to be hidden? Glencore is in full view. After a dead-cat bounce from a quick descent that took Glencore stock from 310 (pounds) to 68 in 5 1/2 months, the stock is rolling over again a headed lower:
This isn’t just about the plunging price of copper, which is now back to its pre-financial system collapse price in 2008 and headed lower. Copper is responsible for generating only 36% of Glencore’s operating income. This is about the plunging prices and demand for oil and all base metals. It’s about a company (global financial system) that hides a lot of risk, debt, derivatives, corruption and fraud. Point of example: Glencore’s funded debt level is $50 billion and it has the capability to draw on credit lines that would take it up to $100 billion. But the sleazebag snakeoil promoters cite Glencore as having $19 billion in ‘liquid’ inventories so the debt number that gets quoted and widely accepted is $31 billion. But it’s not. It’s $50 billion. And Glencore’s ‘liquid’ inventory is the same base metals that are plunging in price from oversupply and lack of demand.