Bear Market


An Affair of Tension

January 31, 2010 by · Leave a Comment 

The Daily Reckoning

“They are married…” said our companion, “but not to each other.”

We were sitting in the Café des Dames…having a coffee with a female colleague. Nearby, the red-haired bum was drinking his own coffee.

At the next table, a group of middle-aged communists was trying to figure out what caused a financial crisis; they had no more idea than Ben Bernanke.

A couple entered the bar. They looked around, trying to find a quiet corner. The way they looked around, it was obvious that they have never been in the Café des Dames before, which meant that they were not from the quartier. In this neighborhood, everybody knows the Café des Dames. It is right on the main drag, across from the subway stop.

They could have been business colleagues too. They were in there 40s…maybe the woman was a year or two older than the man. They wore dark clothes; they dressed as if they were going to a meeting. Attractive. Probably competent. The kind of people who keep the wheels of modern commerce turning.

But there was something furtive about their regards. They were in a place they didn’t know; probably because they didn’t want to be known. These were not young lovers. Nor were they husband and wife.

When they sat down, the woman took the man’s face in her hands and put her own head down. Whatever they were up to, it made them feel under pressure…maybe guilty.

Having an affair must take a lot out of you. You have to watch where you go and what you say. It must make you worry and fret…and wonder…

Is something wrong with your spouse? Is something wrong with you? What if your spouse finds out? Then what? Will you leave your spouse? Will your lover join you? Will things be better? Or will they soon be worse? What about the children?

Yes, dear reader, having an affair must cause a lot of tension – even if it remains a secret. But what do we know? Maybe it’s worth it.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

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The Descent of Money

January 31, 2010 by · Leave a Comment 

The Daily Reckoning

Science and technology have produced many wondrous breakthroughs. But there are some things it cannot improve. A kiss from natural lips is still the lover’s choice. Baby formula proved no match for the real thing. Ersatz money is a flop too. That last item is not so much a fact as a prediction.

The first modern competition between gold and paper money ended like the pre-modern ones. Gold won. Herewith, a short summary:

A rogue, John Law, was the protagonist of the story. He killed Beau Wilson in a duel. Then, he went on the lam…first to Scotland…then to Amsterdam…and finally to Paris. Like Alan Greenspan or Ben Bernanke, he made himself useful to people in high places – in this case the Duke d’Orleans, who needed money. Law had a way to get it:

“I have discovered the secret of the philosophers’ stone,” he is said to have remarked, “it is to make gold out of paper.”

We need to look no further. Law may have been good with figures; it was at philosophy that he failed. A thing cannot be both one thing and a different thing at the same time. It is either gold. Or it is paper. Rarity and durability give gold value – as money. Paper’s most conspicuous properties are just the opposite – it is common…and has a tendency to curl up and blow away.

Law’s new, easy money helped France to an economic recovery – or so it seemed. But in the end, the philosophical error caught up with him. Gold has real value. If you can create it at will, why not create more of it? It was just a matter of time before he had created too much. Soon, there was an angry mob outside Law’s office on the Rue Quincampoix. People who held his paper gold had come to see it in a different light. Where once they cherished it as paper gold…now they despised it as nothing but paper.

Law’s scheme increased France’s money supply – including banknotes and shares in his Mississippi company – by 300%. Prices in Paris doubled between 1718 and 1720. Then, when the new money system began to give way, the Duke d’Orleans “cranked up the printing press.” By 1721, Law’s money was worthless. “Banque” was a dirty word in France for the next 200 years.

The current experiment with paper money began on the 15th of August 1971. Henceforth, said Richard Nixon, foreign countries that wished to exercise their right to trade US dollars for gold could drop dead. From that point forward, the dollar was worth only what someone would give you for it. Philosophers held their breath. But nothing happened. Many have died since, waiting for the dollar to succumb first. Still, the millstones of monetary history may grind slowly, but the more slowly they grind, the more fingers they pinch.

The new paper money standard allowed for a worldwide credit boom – just as in Paris following the establishment of Law’s scheme. The US created dollars. Its citizens spent them. The dollars accumulated as reserves all over the world…and every central bank raced to keep up. Soon, the exporters were producing too much. The importers were consuming too much. And there was too much money and credit everywhere.

The Japanese economy was the first to blow up – in 1989. The tech sector on Wall Street was next to go – in 1999. Finally, in 2007, the planet-wide bubble popped. Suddenly, the whole world was Japan. And now, every nation in Christendom, to say nothing of the others, is following Law’s example. All issue paper gold – in the form of bills, notes, and bonds – as if they were the Banque Royale. Europe is estimated to need $2.2 trillion in deficit funding this year. America will need at least a trillion more. If the depression deepens, maybe $2 trillion. How long can this go on? Where will it lead?

“There are no means of avoiding the final collapse of a boom brought about by credit expansion,” wrote Ludwig von Mises. “The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

On Tuesday, the S&P rating agency issued a warning. If Japan continues in the direction it is going, it will have Hell to pay. Japan leads the way into the future. And into a monetary minefield. Her current deficit – a record – is more than her tax revenue. And her public debt is nearly 7 times as great. Her feet grow larger.

No natural life survives the lifecycle. And no paper currency standard has ever survived a complete credit cycle. It is just a matter of time until we hear the explosion and see body parts flying.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Investors Were Fairly Confident Stocks Would Perform Well ‘Over the Long Run’

January 31, 2010 by · Leave a Comment 

The Daily Reckoning

In the Café des Dames…

The damned bum takes a coffee break!

He spends all day, sitting on the sidewalk outside our office in one of the city’s marginal neighborhoods. His back to the Communist Party headquarters building, he sits on a duffle bag. Red haired. Not bad looking. About 35, maybe 40, years old…he doesn’t ask for alms. He doesn’t do anything. He just sits there. Day after day.

But every day, at about 11:30, he comes into the café on the corner. That is also where your editor sometimes sits and thinks…and where, sometimes, he just sits. The bum orders a cup of coffee. So do we.

We almost forgot. Our beat is money. And we won’t make any money hanging around the Café des Dames watching people come and go. So let’s turn to the financial world…

Yesterday, the Dow was down 150 points the last time we checked it. And this morning, Asian stocks are falling again. China’s stock market has fallen below its 200-day moving average – a bad sign.

Is this a little correction in the long upward climb of stock prices? Is it a pause in humanity’s march to perfection? Or is it a resumption of the bear market that began 2 years ago?

The way we see it, things go up and down…round and round…back and forth. Human life may become more comfortable, with technical progress and innovation. But every life still ends in the same place it did a million years ago. Ashes to ashes…dust to dust…

And what about the life of a company? Or a stock? Or a bull market? You know the answer. They end up where they began, nowhere. Everything ends up in the same place…back where it started. The challenge, as near as we can tell, is to get there with grace and dignity.

Speaking of stocks, the Dow hit a low of 6,547 on March 9th of last year. Most observers believe that was THE low…the nadir of the bear market movement. We doubt it. Even at its low, investors were still fairly confident that stocks would perform well ‘over the long run.’ They saw the problem as a banking crisis…a liquidity crisis, not a fundamental failure of the economy.

And even at 6,547 the Dow had lost only about half of its value…leaving P/E ratios well above typical major bottoms. At major bottoms, you can buy almost any stock on the exchange for 5-8 times earnings. If you were buying the whole company, you’d get a yield on your investment of 15% to 20%. Nice deal.

But in March of last year, when the bear market found its first resistance, corporate earnings were falling too…leaving investors with P/E ratios closer to 20 than to 5.

The bounce lasted more than 9 months and recovered about half of what stocks had lost. If the bulls are right, stocks could correct here…and then go back to their bullish trend. If we’re right, on the other hand, they will fall all the way back to their March 9 low…and keep going, until they finally arrive at their ultimate low. Then, you’ll be able to buy major listed companies and get a decent return on your money – from the dividends.

If we’re right, the economy is in a multi-year period of correction, de-leveraging and depression. The stock market has to notice, sooner or later. And it is bound to get a little gloomy when it realizes what is going on. That should take the Dow down to about 3,000-5,000 on the Dow index. It could be much lower…

The latest figures – keeping in mind that we don’t believe any statistics unless we fiddled them ourselves – show new jobless claims down last week, but not as much as expected. Bloomberg quotes a ‘senior economist’ who tells us that the numbers are going in the right direction, but ‘very slowly.’ The four-week average number, meanwhile, is going in the wrong direction – it shows increased unemployment.

And what about the housing market?

It’s hard to get a clear picture of what is going on. According to Case/Shiller prices are rising in many areas. But so are inventories. It now takes a record 13.9 months to sell a new house – up 50% from a year ago. This must discourage a lot of sellers. Those who can afford it may prefer to hold houses off the markets – waiting for a better season.

The housing market is probably like the stock market, in other words. Just a little slower. The first wave down was driven by defaults, foreclosures and marginal, desperate sellers. The next wave down will be driven by inventories…population trends…and the depression. Many owners still believe prices will come back, when the ‘recovery’ really gets underway. Most likely, they will be disappointed.

If there is any recovery at all…it will be weak, lame and tentative. People wanting to buy houses will look for bargains. Owners will take advantage of every positive move to release more inventory – depressing prices for many years ahead.

What would change things? Well, there is little hope that the crisis will go away. Mistakes gotta be corrected. Leverage gotta go. Depressions gotta do their stuff.

But the nature of the depression could shift suddenly – from deflation to hyperinflation. We don’t expect it. But it could happen. And if it did happen, people might rush to get rid of paper dollars as fast as possible. You’d see a big boost in prices for just about everything – including stocks and real estate.

Even in this case, however, the increases may be less than the losses on the paper money itself. Very hard to predict. In hyperinflation all bets are off.

Do we expect hyperinflation in the US anytime soon? No. We expect years of Japan-like suffering. But we could be surprised…

Bill Bonner
for The Daily Reckoning Australia

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Foreigners Caused America’s Financial Crisis? A Closer Look

January 31, 2010 by · Leave a Comment 

Zero Hedge


Economic Forecasts & Opinions

In his State of the Union address, President Obama reiterated his ambitious agenda to improve the economy and enact sweeping financial reform aimed specifically at the Big Banks. The European Union is also pursuing similarly ambitious changes aimed at preventing another crisis in the future.

At the World Economic Forum in Davos, Switzerland, where more than forty heads of state met, the proposals for financial regulatory reform were part of the focus of deliberation.

There is undeniably an inexorable drive on both sides of the Atlantic to find new ways to tighten bank and capital market regulations in response to an international financial crisis triggered by the bursting of a U.S. property price bubble and the resulted global domino effects.

Foreigners to Blame?

The financial crisis of 2007–2010 has been called the worst since the Great Depression of the 1930s.  Many causes have been proposed and recently, MIT economist Ricardo Caballero made a suggestion that caught the attention of TIME:

“There is no doubt that the pressure on the U.S. financial system [that led to the financial crisis] came from abroad….Foreign investors created a demand for assets that was difficult for the U.S. financial sector to produce. All they wanted were safe assets, and [their ensuing purchases] made the U.S. unsafe.”

Did foreign investment demand really “make the U.S. unsafe”? Let’s go back and take a closer look.

Close Point of Origin – Housing

Most economists and pundits seem to agree that the collapse of the U.S. real estate market in 2006 was the close point of origin of the crisis. The housing bubble bursting caused the values of securities tied to real estate pricing to plummet, thus damaging financial institutions globally.

Sophistication Beyond Comprehension

Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address the 21st century financial markets.

However, the entire financial system had become fragile as a result of one factor, among others, that is unique to this crisis – the transfer of risky assets from banks to the markets through creation of complex and opaque financial products.

In fact, these derivative products are so complex that they mystified even Alan Greenspan, the former chairman of the Federal Reserve.

Unknowing & Unwilling Participants

The banks’ strategy of unloading risk off balance sheets backfired when investors, foreign or otherwise, finally became aware of the complexity and risk underlying these asset backed securities.

A vicious cycle of asset liquidation and price declines was set in motion thereafter as these securities were brought back into the balance sheets, banks had to record losses based on the fair value accounting. Global financial integration made possible for the crisis to spread virtually worldwide.

So, how did we get here?

FSMA – Root of Crisis

The root cause of the financial crisis that led to the current recession may be traced back to the Financial Services Modernization Act of 1999 (FSMA), also know as the Gramm-Leach-Bliley Act (GLBA). The FSMA essentially repealed part of the Glass-Seagull Act of 1933 that prohibited the integration of investment bank, a commercial bank, and/or an insurance company into one entity.

The repeal fostered the consolidation of banks, securities firms and insurance companies, which ultimately lead to “too big to fail.” As a result, these institutions have bulked up their profits primarily through areas far beyond the traditional banking. Some have bought or sponsored hedge funds, while others have moved to invest their own money in the markets.

The investment banking units, far more profitable than the banking operations, have grown dramatically since the FSMA, and the related excessive risk taking along with the subsequent offloading to market played a far more significant role than others in the crisis.

Bigger & Back to Risk

After the collapse of Lehman Brothers about 18 months ago, many of these Wall Street companies were in danger of going under only to be rescued by federal bailout programs. The Trouble Asset Relief Program (TARP) practically guaranteed banks easy profit by providing capital at virtually zero interest cost.

Now, big banks are getting even bigger after scooping up smaller competitors weakened by the housing collapse. According to Bloomberg, the six biggest financial institutions now hold assets equivalent to 62% of the economy, up from 58% before the crisis and 20% in 1994.
 
There are also indications that some big financial institutions are going back to the same risk taking practices that got us into this crisis. The USA Today recently pointed to an independent research by the Demos highlighting that through the third quarter of last year, big banks were increasingly reliant on trading revenue and were taking on more risk in their investment portfolios.

In essence, government guarantees designed to spur lending by letting banks borrow cheaply were instead funding banks’ speculative investments and fueling soaring profits.

Their size and complexity raise the risk of a future financial crisis.

Foreigners Do Not Bring Systemic Risk

In the end, foreigners demand did not bring about the systemic risk. It is the lack of check-and-balance in our system allowing a concentration of risk into the hands of a few that almost brought the world to an utter collapse.

The drivers for enacting the Glass-Seagall Act in 1933 are the same as those for financial reform in 2010. However, a meaningful and globally consistent financial reform seems unlikely amid divided politicians and special interests fighting for short-term advantage.

Endgame and checkmate could come when unfettered financial institutions again push the economy to the brink, and there is no resources left for another bailout or rescue.

Economic Forecasts & Opinions

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Pensions Regain Faith in Hedge Funds?

January 31, 2010 by · Leave a Comment 

Zero Hedge


Submitted by Leo Kolivakis, publisher of Pension Pulse.

Sam Jones and Kate Burges of the FT report that Pension schemes regain faith in hedge funds:

The
number of pension schemes looking to invest money with hedge funds
doubled during 2009, according to a leading investment consultancies.

 

Hewitt
Associates has seen inquiries from clients increase sharply as pension
fund trustees scrabble to find high-performing investment strategies to
help recoup losses

suffered in 2008.

 

“A lot of institutional
investors have got over the emotional block that hedge funds are risky
products that they should be scared of. Clients are much more
comfortable with the asset class,” Guy Saintfiet, a senior hedge fund
researcher at Hewitt told the Financial Times.

 

Other consultants
– which play a crucial role as intermediaries in guiding pension funds’
investments – also report a change in attitudes towards hedge funds.
According to Damien Loveday, a senior investment consultant at Towers
Watson, pension fund trustees had become more sophisticated. Most UK
schemes were now looking to allocate up to 15 per cent of their
portfolio to hedge funds, Mr Loveday said.

 

Pension
fund managers are also looking to make allocations directly to hedge
fund managers. In the past, institutional investors have preferred
exposure via a fund of funds, which pools money and makes diversified
investments.

 

Several of the largest pension funds have already
indicated that they are looking to make significant direct allocations
to hedge fund managers. The £28bn University Superannuation Scheme –
the UK’s second largest pension plan – said on Tuesday it expected to
invest with as many as 30 managers during the next two years. Its
investments will add up to £1.4bn.

 

In
the US, Calpers, the world’s largest pension scheme, said in its
end-of-year statement that it had conducted due diligence on 66 hedge
funds. Like many of its peers, it has yet to make any investment.

 

According to BarclayHedge, the industry data provider, inflows into hedge funds have only just returned to pre-crisis levels.

 

“The
inflow of $54bn [£34bn] in the latest four months reversed only a small
portion of the redemptions of $402bn from September 2008 through July
2009,” said Sol Waksman, BarclayHedge chief executive.

 

But this
year will see actual pension fund allocations rise significantly,
according to Hewitt. “Some of the allocations clients are ready to make
are very significant,” Mr Saintfiet said.

 

Such large allocations are not just for the largest hedge funds either. The New York State Common Retirement Fund allocated $250m last week to Finisterre, the London-based emerging markets fund, which manages just under $1bn.

Let
me remind these pension parrots of a few things. First, 2009 was all
about beta. No surprise that hedge funds came back from the brink as
most of them are taking leveraged beta bets. Second, going forward,
it’s going to be all about alpha. While going the direct route makes
sense (avoid the double layer of fees of funds of funds), the reality
is that the majority of pension funds heavily rely on pension
consultants to conduct a proper due diligence on these hedge funds.
Some oof these consultants are good, most are pathetic. Same goes for
funds of funds.

Third, and most importantly, hedge funds are not out of the woods yet. Margot Patrick of Dow Jones reports in the WSJ, Despite Gains, Most Hedge Funds Can’t Make Performance Fees:

Despite
average 20% returns last year across the industry, most hedge funds
still weren’t collecting performance fees at the end of 2009 because
they hadn’t fully recouped investment losses in the financial crisis.

 

According
to data from Hedge Fund Research Inc., just 31% of funds were in a
position to collect performance fees at the end of the fourth quarter.
HFR estimates that just over 50% of funds reached their “high water
marks” some time in 2009, but not all of them stayed above that level.

 

Until funds get back to their high points, managers usually can’t
collect performance fees–typically around 20% of any gains. Without
that extra money, hedge fund firms can struggle to keep paying staff
out of management fee income–usually 2% of investors’ capital. It also
gives employees less of an incentive to stay on board, if they could
instead get a share of performance fees running a fund that is above
its high water mark.

 

The financial crisis that started with a
credit crunch in mid-2007 and picked up steam with Lehman Brothers’
bankruptcy in September 2008 wreaked havoc on hedge funds, leading
about 2,000 funds into liquidation and shaving hundreds of billions of
dollars off the industry’s assets from fund losses and investor
redemptions.

 

Hedge fund managers who survived are now
rebuilding their assets, and saw $13.9 billion in net new money come
into the sector in the fourth quarter–the best inflow since the start
of 2008. Because of the strong performance gains in 2009, the industry
grew to $1.6 trillion at Dec. 31, 2009, from $1.4 trillion at the end
of 2008, but is still down from $1.87 trillion at the end of 2007.

Hedge
funds are hoping those inflows will continue but they also better hope
the markets keep grinding higher. If they don’t many more hedge funds
will close their doors in the coming year. It truly is that brutal for
hedge funds struggling to deliver alpha in a beta dominated world.

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Asian Selloff Picks Up Where America Left Off

January 31, 2010 by · Leave a Comment 

Zero Hedge


Asia greets February with a lot of red ink. Futures in the US are green… just because. If you are within camera distance of the 9th floor of 33 Liberty, we would love to know how many lit up offices/Bloomberg terminals are visible and churning away.

Hang Seng Futures down 1.8%

Shanghai Composite down 2.0%

 

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Check To Obama: Lloyd To Get $100 Million Bonus

January 31, 2010 by · Leave a Comment 

Zero Hedge


Now that’s some serious pocket change you can believe in. If correct, Blankfein’s 2009 bonus will be over 30% greater than his $68 million take home in 2007, the previous all time record year for Wall Street. Check to you, Mr. President: surely this will merit some more populist rhetoric and even more decisive complete lack of action on your behalf. From the Times of London:

Goldman Sachs, the world’s richest investment bank, could be about
to pay its chief executive a bumper bonus of up to $100 million in
defiance of moves by President Obama to take action against such
payouts.

Bankers in Davos for the World Economic Forum (WEF) told The Times
yesterday they understood that Lloyd Blankfein and other top Goldman
bankers outside Britain were set to receive some of the bank’s
biggest-ever payouts. “This is Lloyd thumbing his nose at Obama,” said
a banker at one of Goldman’s rivals.

Goldman Sachs is becoming the focus of an increasingly acrimonious
political and financial showdown over the payment of multimillion-pound
bonuses.Last week the US President described bonuses paid out by some
banks as “the height of irresponsibility” and “shameful”.

“The American people understand that we have a big hole to dig
ourselves out of, but they do not like the idea that people are digging
a bigger hole, even as they are being asked to fill it up,” he said
last week.

If indeed the bonus number is correct, this is a slap not only in the face of the president, of Volcker, not to mention the other clowns in the economic advisory circle, but all of America’s taxpayers.

A bumper payout for Mr Blankfein would come after discussions by
Goldman’s rivals in Europe to limit executive pay in order to appease
politicians and the public failed last week. Joseph Ackermann, the
chairman of Deutsche Bank, floated the idea of a remuneration cap at a
private meeting of top bankers in Davos on Thursday, but failed to gain
sufficient support. Last night it appeared that Deutsche had abandoned
the plan and decided to pay some of its own top executives bonuses of
millions of pounds.

The possibility of a bonus cap was discussed at a recent meeting
between Alistair Darling, the Chancellor, and top executives from
Morgan Stanley, JPMorgan, Standard Chartered, Citigroup and Barclays
Capital. A banking source said it quickly became apparent at that
meeting that a bank-led pay cap would be unenforceable because rival
bankers would not stick to any agreement. “These guys have been rivals
for years and they just don’t trust each other to do it,” said one
source who was at the meeting.

In other news, the Cessnas are fueled and ready, the beach houses in non-extradition French Polynesia islands are stocked with Red Bull (for those Goldman HFT traders who just… can’t…quit), and the people are about to almost bring the picks and shovels to Wall Street. Almost. But not quite. After all, that 301(k) is up by a whopping 20% last year: surely the good times will roll for ever.

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Foreign Central Bank Treasury Holdings At The Fed Decline In January For The First Time In Years

January 31, 2010 by · Leave a Comment 

Zero Hedge


The last thing that the fixed income market needs now, with ever greater uncertainty out of European bond land,  is weakness where it hurts the most: the US balance sheet. Yet last Thursday’s H.4.1 report indicated something which could be more troubling than even Greece’s credit crisis morphing into a liquidity one, namely, that foreign central banks’ UST holdings at the Fed declined for the first time in over two years.

What could be precipitating this? Quite a few factors have emerged recently:

1) A seemingly endless supply of Treasuries (especially the 2,5, and 7
Y
) for which the indirect take down continues to be over 50%. This alone is
confusing in light of the custody decline.

2) Concerns over developed country sovereign risk: last week S&P downgraded it Japan outlook and issued a scathing report on UK sovereign and financial risk.

3) Kansas Fed’s Hoenig dissent on tightening monetary policy. This is the proverbial first shot across the Fed’s bow. Hoenig’s “believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.”

4) Economic conditions have taken a decidedly bearish tone. JPM’s EASI index of economic surprises (lower means greater amount of negative surprises) just took a dramatic turn lower.

5) Flattening and outright inversion in a variety of financial corp spreads in the 5s10s bracket.

6) AAA CMBS spreads widened by 30 bps. If sovereign risk is in question, why should insolvent REITs be any better?

Regardless of which specific set of news may have precipitated the January Treasury effect, this is truly a scary observation, which however does not jive with the indirect take down continuing to be as strong as ever: if indeed the custody data is correct, then all the indirect bid data has to be taken with not just a dash of salt, but as Rosenberg says, an entire salt shaker.

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Yes Bankers Will Cheat (STILL) – Compensation

January 31, 2010 by · Leave a Comment 

By Karl Denninger, The Market Ticker

You just knew they wouldn’t play by the rules, right?

Investment bankers in the U.S. have begun using equity derivatives to convert restricted shares paid as bonuses into cash, side-stepping new guidelines on remuneration which were designed to prevent bankers cashing out for at least three years, according to a headhunter.

The bankers are using over-the-counter equity derivatives strategies such as call options, put options and collars to monetise their shares now, albeit at a discount to what they would receive if they waited for the restrictions to lift.

The purpose of these rules was to insure that the banksters were actually promoting sustainable operation of the business instead of looting people, which could detonate the company’s share price before they could cash out.

So instead they’re taking a sizable haircut.

What does this tell you about the “sustainability” of their practices?

And why over-the-counter derivatives?  They’re bilateral and thus there is no exchange record of what they’ve done.

Time to break up these banks right damn now folks.  Break ’em all up, shut ’em down, stop this crap right now.

Oh, and if you’re in the markets?  That’s the clearest indication I’ve ever seen that the very people inside know that it’s all going to blow up.

Again.

Before they could otherwise cash their bonuses out.

Ignore the actions of those on the inside at your peril.

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Swiss Bleating: Now We’re Getting Somewhere

January 31, 2010 by · Leave a Comment 

By Karl Denninger, The Market Ticker

Gee, now The Swiss are warning that UBS could “collapse” if UBS lost it’s US banking license:

“The actions of UBS in the United States are very problematic. Not just because they are punishable but also because they threaten all of the bank’s activities,” Eveline Widmer-Schlumpf told Le Matin Dimanche newspaper.

“The Swiss economy and the job market would suffer on a major scale if UBS fails as a result of its licence being revoked in the United States,” she said.

Let’s boil this down, shall we?

Is UBS a US company that locates itself in Switzerland for the express purpose of evading US law or is it a Swiss company that happens to do a significant (but not critical) amount of business in The United States?

The difference is in fact crucial.

If UBS is a Swiss Company located in Switzerland as it’s primary domicile because that’s where it transacts most of its business, but it happens to do some business here in the US then a revocation of its US banking license (which I have repeatedly argued should happen, including here) would be inconvenient but hardly catastrophic.

But if UBS is in fact a US company – that is, in form, volume and character of the business it does it is US-centric, and continues to be domiciled in Switzerland as a means of dodging enforcement of US law, including that pertaining to customers that are US citizens, then we have a larger problem.

I think we are owed an answer as to which case we’re dealing with, and the simplest way to find out is to revoke UBS’ United States banking charter.

And before the usual cadre of “useful idiots” pipes up and starts attacking me without engaging their brain first, let me be perfectly clear:

The Swiss are free to set any sort of legal standard up for their corporations they wish.  I have no argument with their national sovereignty and in fact kind of like some of their viewpoints.

HOWEVER, this is immaterial to the point at hand, which is that just as they demand we respect their sovereignty and the rule of law with regard to their citizens, we have the right to demand the same of all firms that wish to do business inside the United States.

Therefore, if UBS wishes to have a US Banking License they must be forced to comply in all respects with US law irrespective of where the transaction takes place, and when it comes to accounts held by US Citizens this means they have an absolute obligation to report to the IRS as does every United States domiciled bank.  If they do not like this obligation they must surrender their US Banking License and then are free to deal with US Citizens as they desire anywhere else in the world – but they may not have an office, representatives, or business presence in The United States nor may they enjoy the benefits of US Government Support as is offered to all US-licensed financial firms.

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