DOW –247= 11,397
SPX –23= 1200
NAS –52 = 2614
10 YR YLD – = 2.15%
OIL – .11 = 86.27
GOLD – 9.10 = 1671.70
SILV – .36 = 31.90
PLAT – 3.00 = 1559.00
Let’s start with a look at Wall Street. We start with a Merger Monday – normally a positive for Wall Street – today, not so much.
Kinder Morgan agreed to acquire El Paso Pipeline Partners in a deal that valued the company for $20.7 billion and including debt at $37 billion.
The deal is expected to close by the second quarter next year. The combined company is going to be one of the largest transporters of crude oil, natural gas and CO2.
AmeriGas Partners agreed to acquire the propane operations of Energy Transfer Partners,for $2.9 billion. The transaction is expected to close in late 2011 or beginning of 2012.
Brigham Exploration Company agreed to merger with Norway based Statoil ASA. Brigham will receive $4.4 billion in cashand the offer expected to commence by end of this month.
With the purchase the company will extend its shale gas fields to Montana and North Dakota based fields and will deepen its involvement in unconventional oil exploration.
Merger activity was not enough to lift Wall Street, in large part because we still have some problems in Europe. The G-20 was meeting in Germany over the weekend. They wrapped up their meeting saying they would likely adopt a five-point plan next weekend when they meet in Brussels. The plan would likely include recapitalizing banks and reducing Greece’s debt by asking private creditors to accept steeper write-downs, a financial transaction tax would be introduced and a grand growth program would be formulated.. Germany’s Finance Minister warned next weekend’s meeting would not yield a “definitive solution”.
So, it was a tad bit disturbing that the EU, the ECB, the IMF, the Federal Reserve and various other central banks and assorted finance ministers have no idea as to how to end the ongoing financial and economic crisis. All they can do is throw money at the problem, which has not worked and has little probability of working – other than to extend the timeline. The financial markets in Europe and the US are calling for more issuance of credit and more FREE MONEY, also known as quantitative easing. The likely result is that such action will push the world into depressionary inflation.
Greece has passed a large increase in property taxes. Those property taxes will most probably not be paid. Strikes continue day after day as demonstrators march in the streets. A general strike is scheduled on Wednesday. Greece will come to a complete standstill. Knowing Greek debt is unpayable German and French economists are urging a 50% default on Greek debt, which was offered by Greece 1-1/2 years ago. Recent figures call for a 60% to 80% write off. Greece will fall into default – it’s only a matter of when and how much money EU members want to throw at the problem. The markets have priced in a Greek default already, but what hasn’t been discounted is the failure of the other five nations in trouble.
The German government is now guesstimating the bailout for the PIIGS at $3.5 trillion. Other estimates range from $2.8 trillion to $8 trillion. It doesn’t really matter, because anything over $1.5 to $2 trillion just can’t get done. France is already close to losing its Triple-A credit rating. The big French banks were downgraded or put on negative watch last week. The citizens of the solvent countries don’t want to bailout the insolvent countries or banks. No amount of money can prepare European banks for a sovereign default or credit freeze because there literally isn’t enough money on the planet to recapitalize the banking system unless you remove the risks that plague it. I’ve been sharing emails with a listener regarding the size of derivatives markets and liabilities. Now, you have to understand that derivatives are largely unregulated – we don’t know the true size or the true exposure because it is largely a black market. Best guess is that the positions are leveraged somewhere between 28 to one and 50 to one. If the total amount of the bailout is $1.5trillion – it is survivable – anything above that amount, and you start seeing losses which will destroy all existing finance, which have to be multiplied by the leverage of the derivatives.
One estimate has JPMorgan total notional value of Credit Default Swaps at $90 trillion. Merrill Lynch said in a quarterly report in 2008 that a one-notch downgrade of its credit rating would require the firm to post an additional $3.2 billion of collateral on over-the-counter derivative trades. Around that same time, Morgan Stanley estimated in a regulatory filing that a single-level downgrade would mean posting an extra $973 million. And Lehman Bros, before it collapsed, said a one-level downgrade would require about $200 million of additional collateral.
This is what was behind the massive drops in gold, silver, and the broader markets in late 2008. Credit locked up, the cost of capital rose and margin calls ensued. So banks and trading houses sold everything they could as quickly as they could to raise the necessary capital. The selling began in the metals markets because they are most liquid. Then it moved rapidly into the broader equity markets, causing a downdraft that most investors would like to forget.
We experienced a similar thing earlier this summer as a result of more downgrades and prohibitive CDS costs. Not surprisingly, the S&P 500 fell 18% and gold tumbled 15% as the banks’ trading arms raised capital to cover their bets.
And it will happen again when the latest plan fails.
You might wonder – how did this Euro crisis get so out of control? It is a problem of transparency and honesty in accounting. A little sleight of hand played out by the banks, and it was just a matter of time till countries adopted the tactics.
“ After hundreds of years of clear, reliable information on balance sheets, newer policies allowed companies to engage in off-balance-sheet accounting, effectively permitting them to appear more profitable than they really are. Information on debts is passed to the ledgers of “special-purpose entities” (SPEs) – think Enron, which had more than 3,000 SPEs — or swept into illegible footnotes. More broadly, national balance-of-payments accounts were supposed to signal facts regarding financial capital and transfers and debt. Yet no one saw the Greek or Italian sovereign debt crises coming because governments made their fiscal status look rosy by using new financial devices to swap their debts in one currency for another. An old debt looked like an inflow of new money.”
Now, let’s shift to earnings reporting season.
Citigroup booked a $1.9 billion gain tied to a change in the valuation of its own debt, and continued improvement in losses from soured loans allowed the bank to reduce its loan-loss reserve by $1.4 billion. Even without the accounting gain, Citigroup’s $3.77 billion profit exceeded analysts’ expectations. Revenue, however, fell 8% from a year earlier, excluding the gain, to $18.9 billion. Consumer spending abroad, particularly in Asia, helped to boost revenue but couldn’t offset a hit in revenue from investment banking and trading, a business that suffered in the third quarter at all major Wall Street banks. Revenue from capital markets businesses fell 12%, to $4.8 billion. Citigroup reported a profit of $1.23 per share—84 cents excluding the accounting change—compared with $2.17 billion, or 72 cents a share, a year earlier. Analysts polled by Thomson Reuters expected a per-share profit of 81 cents on $19.25 billion in revenue. Just like JPMorgan last week, Citi’s profits come from the DVA, the Debt Valuation Adjustment – which basically says that a loss can be counted as a profit
“These are tough times for most economies and for millions of people,” Mr. Pandit said in the memo. “Macro improvement is not likely to come any time soon.”
“The market turmoil of recent months—driven by external factors from global growth to sovereign debt issues in Europe—has affected the entire economy, including the financial sector,” Mr. Pandit said. “So, against this horrible backdrop – what did Citi do? They reduced their loan loss reserves by $1.4 billion.
The other big bank to report was Wells Fargo, which focuses more on traditional banking of lending to consumers and businesses than it does on investment banking, which was expected to give it a leg up on its biggest competitors. While it did report strong business-lending growth, the bank didn’t lend as fast as deposits poured in.
C -.47 = 27.93
WFC –2.25 = 24.42
BAC -.16 = 6.03
DB – 2.22 = 36.02
ING -.42 = 7.99
UBS -.45 = 11.70
What happens if there is another collapse of a major bank – Will we see more bailouts or will the bank be allowed to fail, and if so how? The Federal Reserve has developed a set of rules that includes asking big banks to submit their plans for how they would like to be dismantled in the event of failure. Under the rule, the largest U.S. banks will have to submit a plan, known as a “living will,” by the middle of next year.
The rule is required by the 2010 Dodd-Frank financial oversight law, and it requires the living wills to be written based on a failing institution going through the bankruptcy process.
The law, however, gives the government power to seize and break up large, failing firms through a new “resolution” process if regulators decide this would be less harmful to markets and the economy.
The intent behind the living wills and the new resolution authority is to avoid the chaos in financial markets that followed Lehman Brothers’ collapse in September 2008, at the height of the financial crisis. The rule applies to banks with more than $50 billion in assets as well as any other company that regulators decide is important to the smooth functioning of financial markets.
Absolutely incredible! I just don’t know where to begin – it is wrong on so many levels.
Occupy Wall Street is now Occupy Everywhere. It is Occupy 70 countries. It’s even Occupy Phoenix. The movement has attracted widespread support as it marks its one-month anniversary. So far, my vote for the most unexpected supporter of the movement goes to Mohammed El Erian, he heads the world’s largest bond fund, PIMCO. He writes, “A peaceful drive for greater social justice can unify people from diverse cultural backgrounds, political affiliations, religions, and social classes…Through constructive collaboration, the movement’s energy and intensity can – and hopefully will — be combined with other influences to formulate forward-looking solutions for an America that must desperately regain its economic vigor, provide more jobs, and deliver better on its traditional commitment to social fairness and equal opportunities.”
PIMCO seems like the personification of the Wall Street caricature. So, what would motivate El-Erian to take up the cause? Well, PIMCO has its own grievances with the banking establishment. PIMCO is currently in a legal battle with another major fund company, BlackRock, against Bank of America over its mortgage backed securities losses in 2008.
The headline of the day comes form the Chronicle of Higher Education: “Intellectual Roots of Wall St. Protest Lie in Academe.” So on the one hand, Occupiers are accused of being uninformed while on the other hand they are accused of garnering advice from people who have expertise in particular fields.
Senate Democrats are unveiling one piece of President Barack Obama’s $447 billion jobs bill. It’s part of a series of bills as Congress carves up the sweeping legislation.
The new measure is a $35 billion aid package to state and local governments to help them avoid layoffs of teachers, police officers and firefighters. It’s virtually certain to be blocked by Republicans opposed to spending money to boost the economy.
The larger jobs measure failed to win a single GOP vote in the Senate last week.
Democrats credit earlier aid packages with saving almost 300,000 education jobs.
Obama is continuing his campaign-style effort to promote his jobs package in appearances in North Carolina on Monday. And he appears to be voicing sympathy for the Occupy Wall Street Movement.
What do you call someone who jumps out in front of a mob and tries to turn them into a parade? (a politician)
A TIP OF THE HAT TO Bob Chapman for uncovering this next story:
A case filed by whistle-blowers on behalf of pension plans for Massachusetts cities and towns in a widening foreign-exchange inquiry alleges that State Street Corp. defrauded customers across the country of $400 million per year for a decade.
The lawsuit, filed with the help of fraud investigator Harry Markopolos in 2009 and later unsealed, purports to represent the interests of nearly 300 municipalities, including the City of Boston, plus the Massachusetts Turnpike Authority and the Massachusetts Water Resources Authority.
Markopolos and a whistle-blower group calling itself Associates Against FX Insider Trading brought the case on behalf of the government bodies. If they succeed, they are entitled to a portion of any damage award.
Such whistle-blower cases typically begin with a confidential appeal to prosecutors to join the case – in this matter, Attorney General Martha Coakley. But Coakley decided not to pursue the case; by law, it later became public. The Globe has obtained a copy of the unsealed court record.
Boston-based State Street declined to comment specifically on the Massachusetts lawsuit. A company statement said: “We continue to vigorously defend the allegations regarding our indirect FX services made in the civil proceedings commenced against us. We offer clients and their investment managers a range of FX execution options and transparency as to our pricing methods.’’
The whistle-blowers allege the 300 municipalities potentially affected by State Street overcharges on foreign-exchange trades held $17.8 billion in assets for 195,000 current and future retirees. They said the funds collectively had 17 percent of their assets in foreign stocks, or about $3 billion.
The lawsuit, and others like it filed around the country, allege State Street overcharged clients on millions of small foreign-currency trades by trading at the best available price of the day, telling clients it had traded at higher prices, and then pocketing the difference.
In the State Street case, Associates Against FX Insider Trading’s members are not named, but Markopolos has acknowledged it is his case.
He and other whistle-blowers filed a similar case against Bank of New York Mellon Corp. in Massachusetts. They also filed a case in New York, where the attorney general last week sued BNY Mellon for $2 billion, alleging over-billing for foreign-exchange trading. If the money is awarded, it could be distributed to pension funds in New York and to large investors around the country.
BNY Mellon denies the New York charges and is fighting them. It had no comment on the Massachusetts allegations.
The Massachusetts state workers’ pension fund has alleged it was overcharged $29 million in foreign-exchange trading fees. But Coakley has said she won’t sue on the state’s behalf, meaning it will have to take its chances in the New York case, or in the whistle-blower case in Massachusetts without her office’s power on its side.
The Markopolos group filed the largest of its cases in California, on behalf of the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, alleging State Street overcharged by $56 million. Governor Jerry Brown, when he was attorney general, took over the case for the whistle-blowers and sued State Street for $200 million, including damages and penalties.
Other foreign-exchange cases are underway in Virginia and Florida. The cases are pending. The Securities and Exchange Commission and Massachusetts Secretary of State William F. Galvin are also investigating.
Can tax cuts “pay for themselves” – inducing so much additional economic growth that government revenue actually increases, rather than decreases? I’ve heard the arguments of the Laffer Curve. I’ve interviewed Art Laffer, and frankly he can’t get his formula off the cocktail napkin it was drawn on. “Dynamic scoring,” has apparently surfaced in the supercommittee charged with deficit reduction – the joint congressional committee with 12 members. Dynamic scoring sounds technical or perhaps even scientific, but here the argument means simply that any pro-growth effect of tax cuts should be stressed when assessing potential policy changes (e.g., reforming the tax code). Even if we allow that there is a positive benefit, I still can’t figure this next news article:
According to the Associated Press, Sen. John McCain (R-AZ) sent a letter to the bipartisan budget supercommittee in which he indicated is open to cost-saving steps in military benefits.
The AP reports that McCain indicated his support for President Obama’s proposal to start charging older military retirees a $200 annual enrollment fee for TRICARE for Life. In addition, McCain urged the supercommittee to consider restricting working-age military retirees and their dependents from enrolling in TRICARE Prime. McCain pointed out that the Congressional Budget Office has estimated that such a move would save $111 billion over 10 years.
McCain also said he supports the administration’s proposal for a commission to review possible changes to the 20 year military retirement system and the current military pay and compensation model.
As of October 1, 2006, 413 retired Members of Congress were receiving federal pensions based fully or in part on their congressional service. Of this number, 290 had retired under CSRS and were receiving an average annual pension of $60,972. And a Senator is eligible for the pension after only 5 years of service.
I guess the idea is to take way any positive economic benefit that might come to veterans having affordable health care and passing that benefit to the health care company running Tricare.