Archive for February 2nd, 2011
Zero Hedge has long claimed that the best stories of Wall Street fraud and corruption come from disenchanted former insiders of the very firms that in 2010 were paid a record $135 billion in compensation. And while we spend day after day chronicling what to other more normal banana republics would seem to be unprecedented criminal activity south of Canal street (and let’s not forget the Park Ave corridor), we are always delighted when an ex-insider discovers their conscience and discloses all the massive fraud they and their coworkers engaged in “once upon a time” especially on Over the Counter desks – the same place where firms such as Goldman Sachs dominate all trading. Today’s story from Omar Rosen on Citigroup’s corporate derivatives team is just such a blatant example. If America had anything even remotely resembling a fair and honest enforcement arm in its regulatory body, this disclosure would be enough to shut down the entire Citigroup derivatives team. As it stands, the firm will probably not even have to pay a fine, without either having to admit or denying guilt.
From Omar Rosen, via The Boston Review
In the spring of 2000, I began a three-year stint on Citigroup’s corporate-derivatives team. I was just months past my twentieth birthday, with no work experience to speak of, in a world beyond my imagination. As my boss summed me up after a day of interviews, I was “fucking unpolished.”
The credit-derivatives group, then just three or four people I sat next to, soon spawned an ever-expanding team managing ever-more complex creations: credit-default swaps, collateralized debt obligations, and the myriad other structures built with black boxes and shrouded by acronyms. Meanwhile, my group continued to peddle mostly the forbears of these recent menaces, the more mundane interest-rate swaps and Treasury-rate locks. The newer derivatives, though hardly identical to their predecessors, nonetheless evolved in similar environments, were likewise designed to manipulate risk, and were also customized on a trade-by-trade basis.
Our clients were non-financial corporations, the Deltas and Verizons of the world, which relied on us for advice and education. Our directive was “to help companies decrease and manage their risks.” Often we did just that. And often we advised clients to execute trades solely because they presented opportunities for us to profit. In either case, whenever possible we used our superior knowledge to manipulate the pricing of the trade in our favor.
I never heard this arrangement described as a conflict of interest. I learned to think we were simply smarter than the client. For unsophisticated clients, being smarter meant quoting padded rates. For the rest, a bit of “legerdemath” was required. Most brazenly, we taught clients phony math that involved settling Treasury-rate locks by referencing Treasury yields rather than prices.
If a client requested verification of our pricing, we volunteered to fax a time-stamped printout of market data from when the trade was executed. One person talked to the client on the phone while another stood by the computer and repeatedly hit print. The printouts were sorted, and the one showing the most profitable rate for the bank was faxed to the client, regardless of which rate was actually transacted. If a rate for the client’s specific trade was not on the printout, we might create rigged conversion spreadsheets for them to use in conjunction with the printout.
Other sources of profit lay in details that clients thought were merely procedural but in actuality affected pricing as well. Once, a client called after his interest-rate swap was completed and asked to change a method of counting days. Unbeknownst to him, this change should have lowered his rate. I made the requested change but kept his rate the same, allowing us to realize unwarranted profit. This was standard practice. My coworkers knew what I had done, as did the traders, as did the people who booked trades. I even tallied the “restructuring” as an achievement in a letter angling for a higher bonus.
When the media discuss a lack of transparency in the pricing of over-the-counter derivatives, they suggest a murky world, where things happen in shadows. This imagery is poorly chosen. “Things” don’t happen in the dark, but in well-lit trading floors like ours. Engaging in these practices was just part of our day-to-day activities, as natural as picking up one’s dry-cleaning. After all, in an open room three-quarters of the size of a football field, with hundreds of people working and mingling, how could anything be wrong?
Last year a friend in the credit-card division of one of the major banks told me that his group had received an award. “Great news,” I thought. He then explained that the group had managed to increase the rates charged on the bank’s entire portfolio of credit cards before regulation limiting such increases took effect. Does this sound like an industry that is learning?
And if Citi was doing it, you can bet that Goldman, JPM, Morgan Stanley, Merrill Lynch, UBS, Credit Suisse, Bank of America, and everyone else was doing it… all in the “privacy” of their own prop/flow trader-commingled, football field-sized trading floors.
By Donald Hank
In a recent video featuring former finance regulator Bill Black exposing fraud and corruption in major financial institutions, the GOP is seen as sticking to a highly questionable philosophy of non-regulation of finance even in situations where non-regulation leads, directly or indirectly, to implementation of taxpayer-paid bailouts and guarantees for bad banker decisions:
This video shows that the old Republican habit of defending a regulation-free banking system could soon be an albatross.
The Old Republican theory is that too many regulations on banks will hamstring the free market. In theory, this libertarian approach to finance makes sense. But only in a vacuum or a libertarian (laissez-faire) utopia does it hold true. In the real world, the government is obliged to guarantee deposits of bank customers against bank failure. But when you relax regulations to the point that banks are no longer responsible for their actions, and the public is obliged to pick up the tab, you get the kind of situation that led to Reagan’s savings and loan scandals. This scandal shows you can’t treat banks as independent businesses subject only to the laws of supply and demand as long as the government guarantees deposits and loans made in these banks. This kind of practice costs the taxpayer a lot of cash, which, in a free market, they would not have to pay. If you want to apply totally libertarian (or free market) solutions, you would also have to deny bank customers all taxpayer subsidized guarantees. This is not going to happen, so some regulations are necessary to protect the taxpayer against either poor judgment errors or criminal behavior of the kind discussed by Mr. Black.
The government used to just guarantee deposits up to a certain amount to protect the bank customer against failure – a practice that in itself led indirectly to some warps. But now we have additionally introduced the reckless concept of government guarantees for loans – in the form of bailouts for banks with lax lending practices but also in the form of coercion of the CRA variety.
That is an untenable situation for the taxpayer, who now is often held at gunpoint every time a bank fails for abusing this protection.
It is arguably more favorable to a free market if the bank is either made 100% responsible for its actions – ie, no bailouts – or the bank is 100% regulated so that bad loans cannot be made. It is also essential to the operation of the free market to prosecute to the fullest extent of the law and breach of bank rules that make banks dependent on public funding in the form of bailouts or the like.
Neither situation will ever develop in the real world, so a balance between regulations for banks and taxpayer-paid guarantees for bank customers must be found.
The blind policy of simply refusing to regulate (to meet GOP demands) while continuing to provide taxpayer-subsidized guarantees for loans and deposits (to meet essentially Democrat demands) will lead to an untenable situation, especially for the GOP. If the GOP is eventually seen as blindly deregulating in ways that directly or indirectly trigger taxpayer subsidies for banks, the GOP will fail to hold onto its lead among voters. Only a few rich bankers could desire such a situation.
The only sensible move is for the GOP to start being more flexible with regard to regulations, specifically where deregulation would entail a risk of public monies being used for bailouts, guarantees on deposits and the like.
Deregulation is a free-market solution only if the government is not paying the bill for bad banking policies and decisions.
It is time for the GOP to realize that taxpayer subsidies to the rich can put them right back behind the eight ball again. The Tea Party must take up this issue.
Holly Petraeus, who will head an office on military issues at the new Consumer Financial Protection Bureau, called on the country’s largest banks to “comply with important legal protections for military personnel.”
There’s a decided lack of reason here, as there is with virtually all “laws” that bear on either government or “favored” institutions.
That is, there’s a lack of an “or else.”
I call upon The Federal Government to change the laws against bank robbery so they contain the same sanction that exists for banks that rob servicemembers.
This way, the service members or their families can rob them back, and face only the same sanction the bank faced when they robbed the servicemember in the first place!
When is this joke of a government going to be forced by the people to stop this crap and start locking people up who break the law?
Ps: Yes, I know the CFPB doesn’t yet have “actual” authority. Does it matter? There is no “or else” in the law!
The world is becoming a very unstable place, and the pace at which things are changing all around us has become absolutely mind-numbing. In fact, change has become one of the only constants in today’s world. Once upon a time, people in the United States could actually make 20 or 30 year plans and feel confident about achieving them. But now, nothing is stable anymore. The financial crisis showed us that some of the biggest corporations on the globe can collapse in a single day. The events of the past few weeks have shown us that entire governments can be brought down in a single week. We live in a world where there are now very few “guarantees” that you can count on. One of the only things that is guaranteed is that technology and information will continue to grow at exponential speeds. This year, the total amount of information produced on electronic devices around the globe is projected to be more than a zettabyte. A zettabyte is equivalent to one sextillion bytes. In other words, imagine a one with more than 21 zeroes following it.
Many of the things that we take for granted today didn’t even exist a few short years ago. Facebook has only been with us since 2004. YouTube has only been with us since 2005. Can you imagine a world where those two websites did not exist?
We live in a world of information overload. Once upon a time it would have been possible to go to sleep for a decade and wake up and everything would still be pretty much the same. But today if you were to do that you would be in for a case of severe culture shock.
Do you remember when you could buy a set of encyclopedias and the information in them would still be good a decade or two later?
Well, things do not work that way anymore.
In fact, most of the articles on this website will be obsolete a month from now.
In today’s world, you really have to think twice before you say that something is “not possible”.
A few months ago, it was absolutely inconceivable that Egyptian President Hosni Mubarak would declare to the world that he has “spent enough time serving Egypt“.
Yet here we are.
One week the government of Tunisia seemed perfectly stable and the next week it was toppled.
Do any of you out there still think that you can make realistic “plans for the future” in today’s world?
Once upon a time in America, many of us were taught that if we worked really hard in school we could get a great job with a great company. We were promised that if we were faithful to that company for 30 or 40 years that we would be treated fairly and given a good pension.
Well, in today’s world you might as well crumple up that plan and throw it into the wastebasket.
There is no such thing as a stable job anymore. Businesses are coming into existence and going out of existence faster than ever before. Today, one out of every four Americans workers has been with their empl0yer for less than a year.
Most Americans still don’t really understand that they are now part of a global economy. They keep thinking that things were the way they used to be. They keep thinking that the U.S. economy is invincible.
Well, those days are long gone. The United States is being deindustrialized at lightning speed. Tens of thousands of manufacturing facilities and millions of jobs have been sent overseas. China, once a complete economic backwater, is now kicking the crap out of us on the global economic stage.
Our financial system is certainly on incredibly shaky ground. Will any of us ever forget what happened in 2008?
Do any of us actually believe that it can’t happen again?
Our health care system is also incredibly unstable. Today, 46 million Americans have absolutely no health insurance. That means that 46 million Americans are just one major injury or illness away from financial ruin with no protection whatsoever.
Not that those that actually have health insurance are protected. According to a report published in The American Journal of Medicine, medical bills are a major factor in more than 60 percent of the personal bankruptcies in the United States. Of those bankruptcies that were caused by medical bills, approximately 75 percent of them involved individuals that did have health insurance.
So just because you have health insurance does not mean anything. One bad accident or one really bad disease and you could be totally wiped out.
Isn’t that comforting?
But the truth is that our entire economy is on the verge of total collapse.
World famous investor Harry Schultz recently published the last issue of his legendary financial newsletter. After 45 years, the following is how Schultz summed up the economic collapse that we are now facing….
“Roughly speaking, the mess we are in is the worst since 17th century financial collapse. Comparisons with the 1930’s are ludicrous. We’ve gone far beyond that. And, alas, the courage & political will to recognize the mess & act wisely to reverse gears, is absent in U.S. leadership, where the problems were hatched & where the rot is by far the deepest.”
David Stockman, the former director of the Office of Management and Budget under Ronald Reagan was quoted by Schultz as saying the following about how desperate things are about to become….
“Get some gold, beans, water, anything that Bernanke can’t destroy. Ron Paul is right. We’re entering a global monetary conflagration. If a sell-off of U.S. bonds starts, it will be an Armageddon.”
Millions of Americans have become “preppers” in recent years as they have come to realize that our economy is headed down a very dark road.
But sadly, the reality is that the vast majority of Americans are not prepared for any kind of economic or natural disaster. As this week has shown us, just the threat of a major snow storm can wipe out store shelves in a single day.
So what would this country look like if a major disaster fundamentally changed life in America and suddenly people were desperate for food and supplies?
It is a frightening thing to think about.
As the pace of change has accelerated dramatically, the U.S. government and other governments around the world have responded by trying to get a tighter grip on everyone and everything.
To get on an airplane in the United States today, you either have to allow a security goon to use a scanner to look over your completely exposed body, or you have to allow a security goon to feel up all of your private areas with the fronts of his or her hands.
Not only that, but the U.S. government has now deployed VIPR (Visible Intermodal Prevention and Response) teams to set up security checkpoints at bus terminals, subway stations and on major highways.
The America that so many of us once loved is rapidly disappearing.
But it is not just our man-made systems that are rapidly changing. Something seems to be happening to the entire planet. Flooding of biblical proportions has hit Australia, Brazil, China and Pakistan over the past 12 months. Scorching heat caused massive crop failures all over Russia last summer. Record-setting cold temperatures and snowfalls all over the northern hemisphere have scientists scratching their heads. On top of everything else, mass deaths of birds and fish are suddenly being reported all over the globe.
Even the crust of the earth is becoming increasingly unstable. Did you see that volcano go off in Japan the other day? Over the past two years it seems like volcanoes have been suddenly erupting all over the world.
Not only that, but sinkholes have become an absolute epidemic all over the planet. Some of these sinkholes have been so large that they have swallowed entire apartment buildings.
In addition, it seems like there is a magnitude 6 or magnitude 7 earthquake somewhere in the world almost every day now. They have become so common that the mainstream media barely even takes notice of them anymore unless one happens near a very populated area.
None of us really knows what the world is going to look like ten years from now. What will the “new” Facebooks and YouTubes be? Will Ben Bernanke’s reckless money printing destroy our economy by then? Will our U.S. dollars still be of any value ten years from now? Will there even still be a U.S. dollar?
Will we still be able to feed most of the people in the world by 2011? Will shortages of food, water and oil start driving people crazy? Could some amazing energy discovery completely transform society?
Who will be the president of the United States? Will there even be a president of the United States? Will war have erupted in the Middle East by that point? Will the United States be in another war by then?
The truth is that things are changing so fast that it is hard to even come up with the right questions to ask. The world is going to change faster this year than it did last year. In 2012 the pace of change will be even faster.
So buckle up and hold on tight because this is going to be one wild ride.
For much more on how incredibly fast the pace of change is in our modern society, check out the video posted below. It is entitled “Did You Know?” and it has been viewed more than 12 million times on YouTube….
Why the difference? The obvious point is that back in the 70s many labor contracts included cost of living adjustments (COLAs). This in turn partly reflected stronger worker bargaining positions and also real doubts about whether monetary policy would contain inflation. Today, none of that: COLAs are rare, and commodity-price fluctuations don’t feed into wages at all.
That’s right. And if you’ve followed me for any length of time you know that this is why I am resoundingly in the “nope” on the “high inflation” or even “hyperinflation” camp.
Why? Because you can’t get there from here without a way to couple back into wages. And we lack that method. It simply doesn’t exist; not only are there no COLA clauses worth anything nowdays but we now have intentional (and admitted!) distortions in the CPI, including “Owners Equivalent Rent” and hedonic adjustment.
Neither of which is related to what you actually pay, incidentally.
See, the CPI’s weighting is an average for “all urban” residents, formally called “CPI-U”, and the claim is made that about 40% of your expenses are housing, and 15% or thereabouts are food and transport, respectively.
This of course is an average. I, for example, pay dramatically less than that for my housing as a percentage of my income, because I own my home outright. I therefore pay property taxes, hazard insurance and utilities and maintenance (the latter, incidentally, is essentially missing as a sub-category on the CPI-U, and that’s a load of crap – ask anyone what the amortized per-year is on a roof, or a water heater, or a furnace or AC unit. They claim “operations” is 0.8% of income – for a $50,000 income household they claim that the total spend on all such items, from lawn care to maintenance and upkeep of the residence, is less than $500 a year?)
I also pay less as a percentage for my transportation (cost of acquisition at present is zero, vehicle is paid for) and for food.
But I have a well-above-average income.
I remember quite well, however, when I didn’t. Unlike Krugman, Bernanke and the rest of these eggheads I didn’t grow up with a silver spoon in my mouth nor did Mommy and Poppy hand me a Piled-Higher-And-Deeper that I did not have to earn with my own sweat. In point of fact, one of my first “real” jobs paid $18,000 a year programming computers for a little dogcrap company in the 1980s. That was $1,500 a month gross and my apartment rental was $600, or 40% of my gross income. The CPI-U counts ”rent” as 5.96% of the weight, or about one-sixth of what I actually had as my real-world ”weighting” for expense.
My transportation was a literal $100 car and I carried minimum-legal insurance. Every stop at the gas station stung the wallet, and the stops at the grocery store were worse. 14% of my income for food? Baloney.
The CPI says that I had about than 30% of my income (net!) left after paying for my transportation, housing and food. My wallet said that I had about $40 per paycheck left, or about $100 out of $1,500, enough for me to afford a couple of six packs and a CD or two once in a while, or a movie. I occasionally had credit card companies try to entice into this or that, but I knew that was a trap from which I’d never escape, as I had a literal zero in terms of ability to service debt on my income.
I know there’s a school of thought that believes that the 1970s are coming back any day now. But I haven’t seen any sign of the return of bell-bottom pants, actually good Hollywood movies, or wage-price spirals.
No, what’s coming soon is what’s happened in Egypt. There is no coupling mechanism to wages in The United States any more.
Egypt has suffered a 45% cumulative inflation rate over the last three years. If you applied that to me in the late 1980s when I made $18,000 a year, I’d literally starve and, when my belly growled loudly enough, guess what I’d be very inclined to do?
Krugman, you’re full of crap. Refusal to confront this head-on and put a stop to it isn’t going to lead to the 1970s or some Weimar Germany outcome.
What it’s going to lead to is privation and starvation, and if we are unfortunate, civil unrest or worse.
One would hope that the impacted people, when their belly growls sufficiently, will choose to take out their anger on the eggheads who have argued for the last three years that The Fed and government are “doing the right thing” by forcing them into starvation so as to protect the banks and other well-connected who caused this mess in the first place.
Unfortunately that’s a hopium-laced belief, because history says that when the belly growls and leads to civil unrest or even civil war and revolution that the last thing the crowd cares about is who and what gets sacked.