Archive for May 7th, 2010
Posted by Karl Denninger
“We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters early today after the leaders met in Brussels.
The solution is simple. I offer up the following three point plan:
You have banks that are reportedly still carrying Iceland paper at “par”, or 100 cents on the dollar, even though it defaulted.
You have banks that make ours look like Girl Scouts in terms of balance sheet opacity and truthfulness.
You have sovereigns that lied about their fiscal condition, and yet both they and the banks that did it along with them have seen little or no real penalty, and in fact you have tried to bail one of them out (Greece.)
Confidence comes from truth.
Confidence is destroyed by lies.
You, like our so-called “officials”, have been lying like crazy for years.
The market is tired of it and called your bluff.
Now you get to choose – either you stop the lying, or market participants will continue to seek ways to force the lying to stop.
Ultimately the market will win if you do not stop lying.
It always does.
And to those who think that Bernanke, Geithner and Obama “got away with it” when they changed the accounting rules here in the US to make legal balance sheet fraud, I point you toward Greece, which thought it got away with it too – for several years.
The Greeks were wrong.
The ECB is wrong.
And our administration is also wrong.
There is only one solution that will work: The Truth.
Yes, it will hurt.
Yes, those who are insolvent will be recognized as insolvent, and go out of business.
Yes, economic pain will have to be taken.
The choice is between pain now and lots more soon, much sooner than you think with these “can-kicking” measures (remember, just one year ago you thought you stabilized the entire system and now we have nations at risk of failure, not just banks!)
The time has come to face reality gentlemen, before it forces recognition upon you – both here and abroad.
Posted by Karl Denninger
If The SEC is anything other than a lying sack of squeeze, it must force all brokers to HONOR NBBO from yesterday’s trades.
A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
So during the collapse yesterday Accenture traded at 0.01, as the below shows:
But Accenture’s “Best Bid” was never 1 cent on the NYSE.
It was on some other markets (e.g. ECNs), and transacted there.
That’s bogus folks.
That the NYSE was “slowing things down” and looking at orders before releasing matched orders does not excuse the broker’s responsibility to get you the best bid or offer.
Those 1 cent prints on Accenture and the ridiculously low prints on P&G and other stocks, at least for issues traded on the NYSE where there were in fact higher (better) bids, must be resolved in favor of the customer, with the brokerage eating the difference.
NBBO is not a suggestion. It is, in fact, a hard requirement of the SEC.
Breaking the trades is unjust. The correct remedy is to force the brokers to honor NBBO retroactively.
This means that if the brokerage reported a “fill” that couldn’t actually happen given the actual NBBO at the time, they get to eat it – they fraudulently reported a fill that could not have, given the NBBO at the time, gone off. Likewise, fills that did occur on an NBBO basis but are radically disadvantageous to the brokerage must stand.
Accenture yesterday at 13:47 had a “best (highest) offer” on the NYSE (for example) at $33.00 (roughly.) On a “third market” there were apparently “stink bids” for one penny.
The people who got filled are entitled to the NBBO at the time.
So the buyer is entitled to his one penny fill (since the brokerage said it went) but the seller is entitled to the NBBO at $33.00 as well.
That a brokerage or group of brokerages routed orders in violation of NBBO makes them the parties that should be on the hook for this.
Those trades should have never happened, as there was no “meeting of the bid and offer” required for a trade to transact. But they did happen, and the responsibility for that having happened rests with the brokerages, which are required to implement NBBO in their systems – and clearly did not.
Yes, I recognize that shoving this down the brokerages throats would bankrupt a number of them.
The rules are what they are, and the sellers and buyers in an orderly market are entitled to rely on the published rules. Those rules say that if I’m selling shares I have a right to be filled at the National Best Bid (that is, the highest) for my shares, and if I’m buying I have a right to the National Best Offer (that is, the lowest) for the shares I purchase.
That’s what NBBO is, and if the SEC does not demand and enforce that rule then we have a mockery of a market where alleged rules are simply ignored at any time when brokerages break them and forcing them to eat their own cooking would cause them to go bankrupt.
The test of the rule of law and procedures isn’t whether they work during “ordinary” times. It is whether they are enforced when someone does something that is (1) under their complete control, (2) that action is taken without regard to the rules or law, and (3) someone is harmed as a consequence.
In this case lots of people were egregiously harmed. Breaking trades is not the right answer as it is both unjust to refuse to honor a fill price for those who found advantage, and also unjust to screw a seller who got hosed through a fill that was in fact on the opposite corner of the market they were supposed to obtain.
This “little event” in fact calls into question whether NBBO exists at all in truth, in that while this is a wild example it raises the question of whether brokerages are matching outside of NBBO all the time, skimming off the transaction and screwing customers to the tune of billions on a routine basis.
Yesterday pulled back a curtain on something that isn’t being talked about anywhere in the mainstream media, but we damn well ought to be, because if those trades could execute outside of NBBO yesterday, they probably can and have on a routine basis every day, to your severe disadvantage.
You heard it here first.
Posted by Karl Denninger
If you had any doubt about what I have been talking about during this entire ramp job off 666 – that the so-called “bull market” was in fact not much more than a handful of institutions buying shares with free Fed money and passing them between one another hoping to distribute them to you – you should be thoroughly disabused of your skepticism after yesterday.
“Revenge of the algorithms” writ large, basically.
We keep talking about how financial innovation has “helped consumers”, “helped businesses” and “made markets more efficient.”
Let me put this in nice, large letters for you:
That claim is one big fat LIE.
If you need anything more after yesterday to understand that all these “algos” have done is create systemic risk and permit a handful of very large institutions to siphon off more and more of your money into their pockets like an insane hoover vacuum cleaner on steroids, you need a lobotomy.
The crooners are of course out in force this morning, among them Jeff Immelt:
“This is a point in time when the world needs the U.S. to be a beacon of stability, a beacon of reliability,” Immelt said during an interview at the 92nd Street Y in New York with Norman Pearlstine, chairman of Bloomberg Businessweek. “The world doesn’t need the U.S. in a food fight right now, with everything that’s going on in Europe. We should be the safe harbor.”
But what’s his definition of this? Why, to make sure GE can continue to siphon off more and more money from the productive economy via GE Capital!
“Financial services is a very important industry in this country,” Immelt said. “Goldman Sachs has been a partner to GE for a long time. We trust them, they’ve done great work for us.”
Yep – hinky derivatives deals are great for Goldman, and might be great for GE as well. For the rest of the world that actually produces something? Not so much.
“This point about damning Wall Street isn’t good for the American economy,” Immelt said.
“Some theoreticians that convinced themselves that you can have a great, productive country that has no technology or manufacturing base — they’re just wrong,” Immelt said. “And I hope that gets beaten into the head of every American. Not that we’re anywhere close to Europe, but there are things that are going on there that ought to be cautionary tales for us.”
Ah, now there’s some truth! But where are all these things being made that Immelt is talking about? In America? Uh, no.
This is the problem in a nutshell, on a macro level. We have replaced factories with Wall Street scams. We have allowed Wall Street to take a few million dollar project in Jefferson County Alabama and turn it into a multi-hundred million dollar boondoggle that winds up costing the taxpayer massive multiples of the actual cost of the productive and necessary improvements to infrastructure.
In Greece this sort of chicanery has led to riots when the government, in bed with the thieves, decided to demand that their citizens pay for the scams and frauds. The people have said no, and intend to enforce their perspective. We’ll see who wins that one, and whether the Greeks control the government, or whether the government controls the people.
If the latter, the Greeks live under tyranny, not a representative government.
There was no glitch yesterday. What happened was a simple bid collapse. Selling was already going on to the tune of some 300 DOW points before the plunge. The FX markets – that is, the currency markets – where undergoing extreme levels of volatility.
But the algorithms – that is, automated computer trading systems that represent the so-called “innovation” that the big banks want to make damn sure continue to skim off pieces of the productive economy for them, triggered off and drove enough SELL orders to collapse all bids.
On a technical level what happened in the DOW is easy: NBBO, or national best bid and offer, was proved to be a JOKE.
That is, when the NYSE specialist system went into “slow mode”, which they do as a protective measure, electronic trading went around it into the “second market.”
That’s nonsense – the premise of NBBO is that this is simply not supposed to happen, in that if I come to buy I’m supposed to get the best (highest) offer, and if I sell I’m supposed to get the best (lowest) bid. When NBBO is circumvented by computer systems that are allowed to “trade around” the specialists that have started examining what’s going on you have a market that gets instantly gamed by the computers and in this case it caused a crash.
Let me be clear: Any trader or investor selling got filled at $0.01 in Accenture yesterday while the NYSE had a higher bid, irrespective of whether it took them 30 seconds to fill you or not, should, if there are actually cops on the beat, be able to force the trading venue that filled them to make good on the difference that they were robbed of.
Of course actually enforcing NBBO in this fashion would likely bankrupt every one of the venues and/or brokerages responsible for the ‘reach around”, so you can bet it won’t happen – you, the trader or investor, will get hosed instead.
But on a fundamental level there’s a bigger problem, and it goes back to what I’ve been talking about for the last three years.
We committed a serious error worldwide during 2008 and early 2009. Instead of forcing bankrupt financial firms to eat their own cooking and fail, backstopping only depositors and spending a couple of trillion dollars on that (while literally closing the big banks) we instead decided to hide their insolvency through outright accounting fraud (getting rid of “mark to market”) and transferring risk to sovereign balance sheets.
You can fix an illiquid system with more liquidity. But if the problem is insolvency – that is, firms have more debt than they have assets and are in fact bankrupt then more liquidity makes the problem worse!
Why? Because all liquidity is in fact debt.
You can’t add more debt to someone that has too much debt and make their situation better. It makes the situation worse! Accounting gimmicks only work for a while, in that they can change how one reports assets and liabilities but cash flow can’t be altered by accounting gimmicks.
Ultimately, cash flow always wins. As I have repeatedly pointed out when evaluating a business I first spend my time on the income statement and cash flow figures. You’re never going to get away with fudging the deposit tickets at the bank, and the money you claim to have either exists or it does not, and is easily verified.
President Obama had the opportunity to come into office and close every large financial institution that, on a mark-to-market basis, was insolvent. This would have included (and still does include) virtually every one of the large banks. Firms like Wells Fargo with $1.7 trillion in off-balance-sheet “assets” have only a tiny amount of actual equity behind that debt – if those alleged “assets” are in fact worth just a tiny amount less than claimed the firm is insolvent. Since they’re off-balance-sheet we have no way to know.
But what we do know is that every week the FDIC proves two things:
Banks are and have been lying about asset valuations, as in virtually every case when they close a bank we suddenly discover that assets have been claimed at values 20, 30, 40 or even 50% above actual value.
The FDIC knows right now what the true values are. It has to in order to be able to tell us what the projected loss to the deposit fund is! Even for a tiny bank it would take days to determine valuations unless they are fully aware of the false claims for days, weeks or even months before they come in and close the firm.
Over the last two years the insolvency in the system has gotten worse, not better. We have hidden it and lied, but we haven’t fixed it and can’t because the system remains overlevered and the firms remain insolvent - it’s just better-hidden.
The large financial institutions took the “liquidity” and used it to play games in the equity market. But this generates no real liquidity in the equity markets – that is there is no depth in the market itself, and as such when the computers come in to sell there’s nobody on the other side willing to buy and the bid collapses.
This madness must be stopped, but doing so means doing what we should have done in 2008 and 2009 – forcing every financial institution to eat it’s own cooking and absolutely barring financial firms with access to fed and government liquidity from trading or speculating in the markets.
Glass-Steagall would have prevented the illusion of liquidity from existing and thus what happened yesterday wouldn’t have. Of course without that illusion we would have also not powered the S&P from 666 to 1219.
So choose your poison folks: either we start telling the truth and have a market that more-clearly reflects actual buyers and sellers, or we will continue to run the risk of the sort of collapse we saw yesterday – and there will be more of them.
Posted by Karl Denninger
WASHINGTON (Dow Jones)–The U.S. Commodity Futures Trading Commission issued a warning to the market on Friday to remind participants that speculative trading limits apply throughout the trading day as well as at the end of trading.
Timestamp, 11:15 Central time
Now let’s look at two charts.
You don’t think that GOLD was being speculatively shorted beyond intraday position limits, do you? That oval, by the way, is right when the announcement was made.
Or shall we look at SILVER?
Naw, there’s no evidence that “someone” (or a few someones) were breaking the law here, is there?
Nobody would ever close out unlawfully-held shorts after being warned by the CFTC, would they?