Financial Talk Radio Content Enhancement Bill of 2013
by Sinclair Noe
DOW + 46 = 13,285
SPX +0.01 = 1494
NAS – 23 = 3130
10 YR YLD +.01 = 1.84%
OIL + .84 = 96.07
GOLD – 17.10 = 1668.70
SILV – .59 = 31.74
Archived audio at www.moneyradio.com (financial review)
First, let’s deal with Apple and then we’ll move on. Interesting side note, on this day in 1984, then-Apple Chairman Steve Jobs introduced the Macintosh, one of the first and most successful personal computers to use a mouse and a graphical user interface Late yesterday, the company announced mediocre earnings. That’s when everyone started freaking out. Analysts dissected every second of the conference call, trying to predict the specs of the next iPhone or what the company might do with its mountain of cash. CNBC’s coverage was especially hilarious. The talking heads asked their expert guests over and over again to tell the people when they should buy this stock; which is like telling people when to catch a falling knife.
The price action has been horrible. The chart’s broken. There’s really no reason to try and catch shares as they continue to flame out. Apple’s fall from grace isn’t the big story here. Just six months ago, Apple stock was trading near $700. The stock made up a whopping 20% of the NASDAQ-100. So every single tick moved the market. If Apple had a bad day, there was a good chance it would drag the rest of the Nasdaq down with it.
What’s important now is how the market will fare with shares of a rather large and formerly-leading stock steadily trending lower. The Nasdaq took a hit today. No surprise. Still, it looks like the Nasdaq has created some separation from Apple. Over the past six months, the Nasdaq is up nearly 7%, while Apple stock has dropped double digits. Rotation has already started. Many speculators have moved out of Apple and on to other opportunities. After all, there are plenty of interesting momentum stocks out there that could become the next rising star.
Apple’s drop won’t be the demise of this market. The company will be fine; they are still making money; it’s not like they’re broke. They have a ton of cash, and eventually they’ll become a boring, dividend paying tech company.
It’s not like Apple is Morgan Stanley for goodness sake. Five years ago, Morgan Stanley put together and sold $500 million of collateralized debt obligation to a Chinese bank and a Taiwanese bank. They loaded the CDO with bad debt and then they bet against it. This is all coming to light because the banks are suing Morgan Stanley, treading where the SEC and the Department of Justice fear to tread. And we are seeing some documents revealed through the discovery process; and it basically shows Morgan Stanley to be disgusting slime. The paper trail includes some emails describing the CDO as Nuclear Holocaust, S-Bag, Hitman, and other colorful names.
And the internal documents outline Morgan Stanley’s business model: “Ability to short up to $325 million of credits into the CDO.” In other words, Morgan Stanley could — and did — sell assets to the Stack CDO intending to profit if the securities backed by those assets declined. The bank put on a $170 million bet against Stack, even as it was selling it. In the end, of the $500 million of assets backing the deal, $415 million ended up worthless.
Why might Morgan Stanley have bet against the deal? They were getting information from fellow employees conducting and receiving private assessments of the quality of the mortgages that the bank would purchase to back securities. These reports weren’t available to the public.
In the fall of 2005, bank employees shared nonpublic assessments of how the subprime market was full of toxic assets, ready to implode. In February 2006, the bank began creating at least one bundle of CDOs worth $500 million, in part so that it could bet against it. In April 2006, the bank created its own internal hedge fund to short the subprime market; employees of that internal hedge fund had access to private due diligence reports. Finally, by early 2007, the bank appeared to realize that the subprime market was faring even worse than it expected. So Morgan Stanley bankers looked to peddle as a safe and sound investment what its own employees were internally deriding, with very colorful names.
How does someone sell something they know is a toxic asset? “Hey, just calling to let you know we got a nice little CDO here at the shop, we call it Nuclear Holocaust, but don’t let the name fool you. This baby’s a beauty.”
Mary Jo White has been selected as the next SEC chairwoman to replace the outgoing Mary Schapiro. As a former United States attorney in Manhattan, Ms. White has a strong law enforcement background. White also spent more than 10 years as a leading white-collar defense lawyer. That means she has also been privy to how firms and individuals respond to government investigations.
Also, Lanny Breuer is leaving his post as the head of the criminal division of the Department of Justice. A couple of nights ago, PBS ran a Frontline show call the Untouchables, dealing with the financial crisis, and specifically the lack of prosecutions; the show included an interview with Breuer. Breuer has been criticized for his lack of interest in prosecuting banks and more important, bank executives for their conduct during the crisis, and the basic justification was that such cases are difficult to make. Kind of like having a Pope who doesn’t believe in religion.
While it may be difficult to prosecute for some crimes like fraud, history teaches us that there are many ways to skin a cat. Remember the Prohibition-Era gangster Al Capone was not convicted of bootlegging, he was convicted of tax evasion.
Top bank executives could be prosecuted for making false certifications under Sarbanes Oxley, which requires at a minimum that the bank certify the adequacy of internal controls, which for a large trading firm, includes risk management. Another approach might be collusion and lack of arm’s length pricing in the CDO market, which would lend themselves to antitrust charges. Price fixing is criminal under the Sherman Act.
This is a Department of Justice that has been willing to pursue creative and sometimes strained legal theories to go after John Edwards, and used a weak case to destroy Aaron Swartz, but becomes remarkably unimaginative as far as big bank misdeeds are concerned.
The false premise in the “protect the banks at all cost” has always been that it would cause too much collateral damage, but this left the American people to bear the cost of Wall Street’s scams. Even any half cocked comparison of the relate “cost” being shoveled onto the American public compared to an FDIC resolution of even one of the Too Big To Fail banks shows this excuse not to prosecute is non-sense.
It will be interesting to see where Mr. Breuer lands in the private sector. His legacy at the Department of Justice is that crime does pay, extremely well.
On that subject, sort of, Christine Lagarde, the managing director of the IMF, the International Monetary Fund, speaking at the World Economic Forum in Davos warned that corrosive inequality is hurting the world’s economic recovery. In a combative speech to an audience of some of the world’s wealthiest financiers, Lagarde said that bankers’ pay should be cut to close the gap between the rich and poor: “Excessive inequality is corrosive to growth; it is corrosive to society. I believe that the economics profession and the policy community have downplayed inequality for too long.”
Ms Lagarde also warned that necessary reforms of the multinational banking sector were being watered down by industry lobbying. She said: “We can already see too many signs of waning commitment – dilution of reforms, delays in implementation, inconsistency of approaches. And we can see the risks – a further weakening in capital and liquidity standards; and not enough progress on key areas like cross-border resolution, shadow banking, and derivatives.” Lagarde told delegates that bankers’ pay is too high: “Ultimately, this is all about accountability: we need a financial sector that is accountable to the real economy– one that adds value, not destroys it.”
Lagarde was speaking after Jamie Dimon, chief executive of US bank JP Morgan, launched an attack on banking regulators, who he accused of botching attempts to protect taxpayers from future bailout costs. Dimon may have been a bit unhinged when he claimed banks were “ports in the storm” during the crisis. Side note here: The AFL-CIO’s Reserve Fund, a union fund that owns JPMorgan shares, wants the bank’s board to form a committee that would explore breaking up the bank. In response, JPMorgan is seeking permission from the SEC to prevent the measure form coming up for a vote at the next shareholders meeting in the Spring.
Today, British Prime Minister David Cameron, speaking in Davos, called for a global effort to clamp down on tax avoidance by businesses and more urgent efforts to stimulate global trade. The UK has had a running battle with several multi-national corporations not paying taxes, including Google and Starbucks. Cameron took a swipe at the coffee seller: “Any businesses who think that they can carry on dodging that fair share, or that they can keep on selling to the UK and setting up ever-more complex tax arrangements abroad to squeeze their tax bill right down — well, they need to wake up and smell the coffee, because the public who buy from them have had enough.” Last month, Starbucks caved to public pressure and agreed to pay more UK taxes.
And back in Washington, the House has officially passed a bill to temporarily suspend the debt ceiling until May, kicking the can down the road to financial Armageddon. We still get another fight in March, when spending cuts kick in automatically and the government budget actually expires, and we have the possibility of a government shutdown. The bill is officially titled the “Financial Talk Radio Content Enhancement Bill of 2013”.