Lie or Be Lehman
Financial Review by Sinclair Noe
DOW + 121 = 18,162
SPX + 19 = 2123
NAS + 73 = 5106
10 YR YLD – .01 = 2.13%
OIL – .38 = 57.65
GOLD + .20 = 1189.00
SILV – .07 = 16.75
Yesterday the Dow posted a triple digit loss, today a triple digit gain; not enough to cover yesterday’s losses. The Nasdaq was higher on strength in semiconductor stocks; the Nasdaq posted a new record high close, taking out the high from April 24. The dollar was slightly stronger, oil was down again.
Severe storms and devastating floods over the weekend in Texas and Oklahoma have killed at least 19 people. Another 14 people are missing in Texas, including eight members of two families whose vacation home was swept away. The flooding has also resulted in complications for business travelers. About 11 inches of rain fell in Houston on Monday while parts of Austin have been hit by as much as 7 inches. Helicopter crews in both cities rescued people who had been stranded in cars and on top of buildings. The National Weather Service issued a new flash flood warning today.
The IRS says tax return information for about 100,000 U.S. taxpayers was illegally accessed by cyber criminals over the past four months. The stolen information included tax returns and other tax information on file with the IRS. The IRS said the thieves accessed a system called “Get Transcript.” In order to access the information, the thieves cleared a security screen that required knowledge about the taxpayer, including Social Security number, date of birth, tax filing status and street address. The IRS is notifying those affected. The IRS said the breach does not involve its main computer system that handles tax filing submission, and that system remains secure…, for now.
A red card for FIFA, the Federacion Internationale de Football Association, plus 14 arrests for illegal activities that make the governing body for soccer look more like a mafia crime family. The Department of Justice indictment names 14 people on charges including racketeering, wire fraud and money laundering conspiracy. In addition to senior soccer officials, the indictment also named sports-marketing executives from the United States and South America who are accused of paying more than $150 million in bribes and kickbacks in exchange for media deals associated with major soccer tournaments. Law enforcement officials say their investigation has just begun and there will be more action taken to clean up the sport. As leaders of FIFA gathered in Zurich for their annual meeting, more than a dozen plainclothes Swiss law enforcement officials arrived unannounced at the Baur au Lac hotel, an elegant five-star property with views of the Alps and Lake Zurich. They went to the front desk to get room numbers and then proceeded upstairs. The concierge called the guest and informed them they should open their hotel door rather than having police break it down.
Swiss police arrested seven FIFA officials who are now awaiting extradition to the United States. Swiss prosecutors said they had opened their own criminal proceedings against unidentified people on suspicion of mismanagement and money laundering related to the awarding of rights to host the 2018 World Cup in Russia and the 2022 World Cup in Qatar. The president of FIFA, Sepp Blatter, was not arrested but he might be questioned in coming weeks. Meanwhile, the US Department of Justice alleges a “24-year scheme” for FIFA officials “to enrich themselves through the corruption of international soccer.” Why is the US leading this investigation? Well, it involves some US sports marketing people and apparently many of the bribes were paid in US dollars and funneled through US banks. Beyond that, we just really don’t like soccer.
G-7 finance ministers and central bankers are meeting in Dresden, Germany. The host country set the agenda and it did not include discussion of Greece. They might not stick to plans. US Treasury Secretary Jack Lew spoke with Greek Prime Minister Alexis Tsipras today for the second time in less than a week and told a London audience that “everyone has to double down” on reaching an accord. While the G-7 doesn’t have a mandate to decide how to deal with Greece, it brings together officials from the Eurozone’s three biggest economies, as well as the European Central Bank, The International Monetary Fund, and the European Union – the institutions backing the $262 billion aid package that expires next week. The Greeks are reportedly drafting an accord. Maybe they could borrow some money from FIFA.
Richmond Fed boss Jeffrey Lacker says policymakers must ensure that financial industry creditors do not expect government bailouts and must be willing to let firms fail in order to restore market discipline. Lacker also continued his assault on Dodd-Frank’s Title II and repeated his call to repeal the Fed’s emergency lending authority, arguing that less regulation, not more, is needed to make the system safer.British monarchy may appear to be nothing more than a vestigial ceremonial version of leadership, yet in that role, Queen Elizabeth delivered a speech today to mark the State Opening of Parliament and she promised an in-or-out popular vote on membership in the European Union. That has been a matter of debate and now the path towards a vote looks potentially shorter than anticipated, with some now talking of a referendum in 2016 rather than 2017.
Fed Chair Janet Yellen plans to skip the annual gathering of economists and policy makers in Jackson Hole this year, marking the second time in three years the Fed’s top official won’t be traveling to Wyoming. Yellen’s predecessor, Ben Bernanke, skipped the 2013 gathering. The topic of this year’s conference is inflation dynamics and monetary policy.
Former Federal Reserve Chairman Ben Bernanke said he does not see signs of extreme movements in the US real estate and financial markets. Bernanke also said that if the Fed lifts interest rates, it would be good news because it means the U.S. economy is strong enough.
Royal Bank of Scotland, Britain’s largest taxpayer-owned lender, could pay as much as $4.5 billion to resolve claims of misconduct in its handling of US mortgage securities. The legal action relates to $32 billion in residential mortgage-backed securities sold to Fannie and Freddie from 2005 to 2007.
Back in 2005 Deutsche Bank was selling derivatives that were supposed to be a form of insurance against a huge financial disaster. And after they had sold billions of dollars of these derivatives, they started writing guarantees to the pool, or conduit, that was writing the guarantees. Deutsche was getting its derivative based version of insurance from Deutsche Bank’s own money; essentially selling derivatives on the derivatives it was selling to itself; while taking a commission off the top, of course. And by the way, these derivatives were super-senior, so they were highly rated – that’s an important point. When things went bad in 2008, they charged more for the derivative form of insurance because it was highly rated, but they also still treated it as if it was very highly rated, even though the world of finance was melting down. Deutsche figured that there was not a reliable method to measure the risk in light of the market conditions, and so they just figured there was zero risk. Ultimately, the realities of 2008 showed that risk was quite a bit higher than zero. The SEC thought the whole thing was a bit fishy, but Deutsche maintained that it did not suffer any losses. Which was true because the insurance/derivatives never paid off. And the reason it never paid off was because it was highly leveraged, and it might have destroyed the bank, and they were clever enough to write into the derivative contract that they might not pay if they didn’t want to, so they did not pay. And in Deutsche’s twisted logic that meant the derivatives were very high quality; so good that they sold them to clients and even bought some themselves and then held it on their books as high credit quality capital.
In 2010, three whistleblowers stepped up to say that Deutsche had mismarked billions in exposures in 2008 and 2009 to make it look healthier than it really was. And this is important because banks are required to keep a certain amount of very safe capital available in the event of a problem; this is called tier one capital; and if a bank does not have enough tier one capital on hand, then they are basically considered insolvent. For example, in 2008, Lehman Brothers did not have enough tier one capital and they collapsed. As it turns out, Deutsche Bank did not have enough tier one capital on its books in 2008, but they did have highly leveraged derivatives, which were kind of, sort of like insurance created out of thin air, and backed by other derivatives, which were backed by their own capital, which was protected by nothing more than imagination and bogus credit ratings.
If Lehman Brothers had been smart enough to create derivatives out of thin air and call them insurance, they might never have collapsed. And If Deutsche Bank had not lied about the credit quality of their derivatives, they could have ended up like Lehman. But that didn’t happen, because Deutsche Bank lied. Yesterday, the Securities and Exchange Commission said that Deutsche Bank made material misstatements about a giant derivatives portfolio, inflating its value at the height of the financial crisis; and the bank failed to account for a “material risk for potential losses estimated to be in the billions of dollars”. The bank agreed to pay a $55 million penalty, without admitting or denying wrongdoing. Nobody goes to jail. The bank is not sanctioned. Deutsche said it had cooperated with regulators throughout the investigation and said the settlement “will have no impact on previous financial reports.” Hey it was a long time ago, in the ancient past. And the moral of this story is that when a bank gets in trouble, they should lie or be Lehman.