Tuesday, July 10, 2012 – Starting to Detect a Pattern

Starting to Detect a Pattern
– by Sinclair Noe

DOW – 83 = 12,653
SPX – 10 = 1341
NAS – 29 = 2902
10 YR YLD -.02 = 1.50%
OIL +.23 = 84.14
GOLD – 20.80 = 1567.50
SILV – .53 = 26.91
PLAT – 20.00 = 1429.00

Did you ever write a note to yourself, maybe you even wrote it down on your calendar, something that required your attention, and even with the reminder, you never got around to it. Treasury Secretary Turbo Tim Geithner pulls out one of the old calendars, and there it is, plain as day, a little memo to himself from back in 2008, when he was heading up the Federal Reserve Bank of New York. The memo says: Fixing Libor. That’s what it says right there after lunch on a Thursday,  just before an appointment with his accountant. Fixing Libor. And then there were all those emails, and phone calls, and Bear Stearns collapse, and there was the money market thing, and well, you know how it is. 

Meanwhile, legislators on Capitol Hill have signaled they are interested in learning more about what Fed officials knew with regards to allegations of Libor manipulation.

Rep. Randy Neugebauer, chairman of a subcommittee of the House Financial Services Committee, sent a letter to the New York Fed asking for transcripts of any “communications with Barclays regarding the setting of interbank offered rates from August 2007 to November 2008.”

Tim Johnson, who chairs the Senate Banking Committee, said today he was concerned by the allegations of the potential “widespread manipulation” of Libor and had directed his staff to schedule briefings on the issue. Johnson also said the committee planned to ask Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke about the allegations at hearings later this month. Well, I’m sure that will resolve absolutely nothing. 

Regulators, including the New York Fed, had a responsibility to force greater integrity and cooperation, and it had clearly reviewed the situation and had the resources to investigate; the problems with Libor were clearly within their jurisdiction. Barclays had US operations. Of course the Federal Reserve is a regulator that doesn’t much believe in regulation; kind of like a Pope that doesn’t believe in religion. 

It’s not like the Fed did nothing. Officials with the New York Fed talked to authorities in Britain about problems with the calculation of Libor and also heard from market participants about whether an alternative could be found for Libor. In early 2008, questions about whether Libor reflected banks’ true borrowing costs became more public. The Bank for International Settlements published a paper raising the issue in March of that year, and an April 16 story in the Wall Street Journal cast doubts on whether banks were reporting accurate rates. Barclays said it met with Fed officials twice in March-April 2008 to discuss Libor. And that was that.

Meanwhile, British lawmakers are continuing their investigation of Barclays role in the rate rigging, and it looks like Barclays former chief executive Bob Diamond may have been lying in his testimony last week, when he claimed he didn’t remember anything about a letter from regulators warning about problems and questioning the banks behavior and culture. The letter read: “The cumulative effect … has been to leave us with an impression that Barclays has a tendency continually to seek advantage from complex structures or favorable regulatory interpretations,” in other words a pattern of bad behavior. 

Remember MF Global? Sure, the brokerage firm that made a few bad bets with clients’ funds, Jon Corzine played fast and loose, stupid enough to leave some of the money with JPMorgan, and next thing you know, whooosh, the money ($1.6 billion) had  just vaporized. It happened again; this time to Peregrine Financial Group, which did business as PFGBest. The National Futures Association froze the funds of the Iowa-based brokerage after discovering an estimated $220 million shortfall in PFGBest’s customer accounts. Russell Wasendorf, the sole owner and chairman of the brokerage may have falsified banking records for the past couple of years. Wasendorf is in a coma after an apparent suicide attempt. The scheme apparently began to unravel after the NFA began to press Wasendorf to confirm balances electronically and directly with the bank. PFGBest’s customer money was held in an account with JPMorgan Chase. Nobody can find the money. Apparently it just – whooosh – vaporized. 

I’m not certain, but I think I’m starting to detect a pattern here.

JPMorgan has been busy lately. They’ve had to deal with the $2 billion dollar, or maybe $3 billion dollar loss, which might be as big as a $9 billion dollar loss on bad credit-derivatives trades with customer deposits by a London trader known as “the London Whale.” The bank is expected to reveal details of its losses on Friday, when it’s due to report quarterly earnings. Then last week brought a New York Times story that the bank had pushed mutual fund customers into its own high-fee funds. Meanwhile, the Federal Energy Regulatory Commission is investigating charges that the bank manipulated power markets in California and the Midwest. And JPMorgan is one of the many banks reportedly under investigation in the ever-growing Libor scandal.

Yes sir, it’s almost like there is a pattern of behavior here. Maybe we can get the Federal Reserve to look into it, maybe they’ll put the issue on their calendar of things to do. 

The Jobs Act, which President Obama signed into law in April, affects companies that generate less than $1 billion in annual revenue. Proponents for the act have said it will help companies raise capital to grow, while critics have said it loosens protections designed to protect investors. One of the rules in the Jobs Act allows companies to file their drafts of their registration statements confidentially with the U.S. Securities and Exchange Commission. Its kind of a quick and easy, short-form version of an IPO. 

 According to the study by accounting and consulting firm BDO, a majority of bankers believe the  Jobs Act may open the door to accounting scandals by loosening regulation on smaller companies. About 55 percent of capital markets professionals surveyed at investment banks think the rollback in regulations increases the risk of scandals, and they should know.

A new research paper from the International Monetary Fund finds that  a strong banking industry can help a society expand economically, but the researchers say that only remains true up to a point. Eventually, they claim, you reach a threshold of diminishing returns. Once a country’s financial sector swells above a certain size, it becomes associated with “a negative effect on economic growth.”

The research suggests that there are several countries that would probably be better off with a smaller financial sector.  The researchers say the tipping point between positive and negative is when the financial sector extends an amount of credit to private industry that’s between 80 and 100 percent of the national gross domestic product.  The World Bank estimates that the US financial sector provides a chunk of credit to private businesses and investors that’s worth about 165 percent of the national GDP. The report finds that when banks get too big they tend to devote their time and efforts to pumping up their own profits, betting against markets, misleading clients, and basically wasting hundreds of billions of dollars a year simply by doing nothing that adds value to the economy of the country. One of the dangers of an overly large financial sector is – according to the report – the increased probability of large economic crashes. 

Unions representing civil servants in Scranton, Pa., filed suit today after the mayor cut pay for police, firefighters, garbage collectors and other public workers to minimum wage, saying that was all the city could afford.  Unions representing police, fire and public workers in the city of 76,000 filed three lawsuits after the city defied a judge’s order and issued paychecks Friday that paid 398 city employees at the minimum wage of $7.25 an hour.

The lawsuits against Mayor Chris Doherty include one filed in federal court under the Fair Labor Standards Act accusing the city of failing to pay wages on time and failing to pay overtime. Another lawsuit seeks to hold the mayor in contempt for violating a judges order. Yet another alleges that benefits for disabled police and firefighters were cut without a hearing.

The city of Oakland  California in 1998 entered into the deal with Goldman Sachs to protect itself from potential interest rate spikes on city bonds used to fund police and firefighter pensions. But interest rates have remained low, and the city is paying the company an interest rate that is much higher than the prevailing rate Goldman pays Oakland.  The city has paid Goldman about $32 million more than it has received so far on the deal, according to labor and other community leaders, and may lose another $20 million before the investment expires in 2021.

City negotiators have been meeting Goldman for six months about reducing the estimated $15 million cost to terminate the agreement but have had no success. So, the Oakland City Council voted unanimously this week to stop doing business with Goldman Sachs if the company does not agree to cancel an investment deal that is costing the city $4 million this year. We’ll see how it works out

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