2015 Year In Review (Part 2)

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Part 1

Part 2

Banks and Bankers

“The money powers prey upon the nation in times of peace and conspire against it in times of adversity. It is more despotic than a monarchy, more insolent than autocracy, and more selfish than bureaucracy. It denounces as public enemies, all who question its methods or throw light upon its crimes. I have two great enemies, the Southern Army in front of me and the Bankers in the rear. Of the two, the one at my rear is my greatest foe. . . . I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my Country. Corporations have been enthroned, an era of corruption in high places will follow, and the money power of the Country will endeavor to prolong its reign by working upon the prejudices of the People, until the wealth is aggregated in a few hands, and the Republic is destroyed.”

~ Abraham Lincoln

“Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.”

~ Goldman disclaimer

We have come down from the trees but are not out of the woods yet. The six biggest banks are ginormous—50% larger than they were at the previous high at the start of the crisis—but the sector was relatively quiet this year. Hundreds of billions in fines have been levied by various governmental Rainbow Coalitions. As statutes of limitations began to run out, Eric Holder and authorities declared there would be no prosecutions of individuals responsible for the crisis.¹⁶⁰ For those wishing to probe the origins of Holder’s Catch-and-Release Program (CARP), read the Holder memo from years earlier in which tough talk is interwoven with a guide for how corporations can shake the hook if caught.¹⁶¹ This ain’t exactly CSI Wall Street.

Rumors that the Justice Department intends to rip up a non-prosecution agreement and go after Barclays, JPM, Citigroup, the Royal Bank of Scotland, and UBS sound hollow when it’s said the Federales are “mindful that too harsh a penalty could imperil banks that are at the heart of the global economy.”¹⁶² Am I the only one who would still like to see some systemically important bankers hanged on prime-time television? Blogger Michael Krieger suggests they will swing like Billie Holiday’s “strange fruit,” but Michael is an optimist.¹⁶³ Curiously, while Jon Corzine considers setting up a hedge fund for the hopelessly gullible, he remains at risk for prosecution.¹⁶⁴ By contrast, Jamie Dimon joined the billionaire club¹⁶⁵ owing to his stellar stint as CEO of JPM, producing zero capital gain and 1.7% dividend/year over the last 15 years. Well done, Billy Ray.

There are rumblings under the surface at Deutsche Bank, and it is likely we are not yet getting the full story. It’s hard to imagine a $2.5 billion pocket-change settlement would bring it to crisis mode.¹⁶⁶ Bank officials admitted soon afterward that they omitted a few niggling details. The two top dogs got fired.¹⁶⁷ Rumors of problems with derivatives are circling.¹⁶⁷ One could imagine a host of problems emanating from the commodity collapse. I suspect the Greek crisis has been about a Deutsche Bank bailout. Even the dot-gov websites are citing “Deutsche Bank’s illegal conduct,” which “involved nearly a decade of lying, cheating, and stealing . . . a brazen scheme to defraud Deutsche Bank’s counterparties and the worldwide financial marketplace by secretly manipulating LIBOR.” Way to sugarcoat it. Don’t be surprised if the Europeans end up bailing it out more explicitly.

HSBC is a reconstituted BCCI and has been on a global crime wave. Leaks via one grumpy tech guy in 2008¹⁶⁸ showed that HSBC’s clients are crooks and scoundrels. Apparently, the bank was aiding and abetting tax evasion (although I didn’t know drug lords paid taxes).¹⁶⁹ It tried to squelch the story by controlling the media and vetting unfriendly stories (about narco terrorism, for example),¹⁷⁰ but this is the digital age. E-permanence is a bitch, ain’t it?

Bank of America is rumored to be rehypothecating funds to speculate in complex trades,¹⁷¹ although I suspect it is technically not rehypothecation but rather legal seams to be exploited. Wells Fargo got caught in a fee scandal and customer reaming.¹⁷² I wonder what the Orifice of Omaha knew and when. And in shocking news, Santander, the bank into which the system dumped buttloads of detritus during the crisis, is in trouble.¹⁷³ Citi solved its problems (or so it thinks) by quietly shoving over $70 trillion in derivatives under the protective apron of the taxpayer while nobody was looking.¹⁷⁴ The bad bank that was created in the aftermath of the Hypo collapse is about to be unwound.¹⁷⁵ Seems being a “bad bank” is not a viable business model.

“Dodd-Frank isn’t perfect: it should have broken you into pieces.”

~ Elizabeth Warren to Citigroup

The Export-Import (Ex-Im) Bank is nothing more than a “vast, well-funded network of consultants, lobbyists and big-government interest groups” to quote Heritage Action CEO Michael Needham.¹⁷⁶ It provides funding to sovereigns who can’t get loans to buy goods. Right. Credit is so tight. GE is a big benefactor, rumored to have scooped up over 64% of this largess.¹⁷⁷ The Ex-Im Bank moves the credit system away from the free market and into the jurisdiction of government. Freedom of Information Act requests largely fail owing to e-mail malfunctions. Boeing turned to blackmail by threatening to move jobs abroad if Ex-Im Bank renewal is voted down. Well-placed campaign donations will solve this problem.

“But when governments decide who wins and loses, success increasingly depends less on how hard you work and more on who you know in Washington.”

~ Jeb Hensarling in an open letter on the Ex-Im Bank renewal

GE, which is technically not a bank, is dumping GE Capital, which operationally is a bank.¹⁷⁸ Does it see something in the consumer credit market to cause an exit, stage left? It may have just rung the Sam Zell bell. A week after announcing the sale, GE reported a first-quarter loss of $13.6 billion,¹⁷⁹ hastening to add that if you exclude the bad shit—tens of billions of dollars of bad shit—it made money. Einhorn noted that a $16 billion after-tax charge “would drain 5 percent to 7 percent from S&P 500 quarterly earnings.”¹⁸⁰ He noted tongue-jammed-in-cheek that by exiting GE Capital, GE will “own up to its cumulative chicanery rather than face its first Fed-supervised stress test” and that this may be “one of the first real successes of Dodd-Frank.”

“This criminal behavior went on for years, unchecked and undeterred.”

~ Kara Stein, SEC Commissioner on prosecution waivers

The Fed

“It’s self-defeating to use the wrong monetary policy.”

~ Ben Bernanke, former FOMC chairman

“Get off zero and get off quick. . . . Near-term pain? Yes. Long-term gain? Almost certainly. Get off zero now!”

~ Bill Gross, Janus Funds

“The Fed is screwed.”

~ Peter Boockvar, chief market analyst of the Lindsey Group

We spent the year waiting for the Fed to raise the Fed funds rate—the so-called “liftoff”—to an exorbitant 25 basis points (0.25%). Deutsche Bank called this a “controlled demolition” of the market. Really? Seems much ado about nothing except the markets are leveraged up the kazoo, the dollar is soaring and putting huge stress on emerging market debt denominated in dollars, and the average leveraged speculator on Wall Street hadn’t made it to first base when the Fed last raised rates 11 years ago. One estimate puts the added global debt service at $500 billion for each 25 basis points.¹⁸¹ Zerohedge notes that it will cause an instantaneous unwinding of one QE unit ($800 billion).¹⁸² The Fed thinks, however, that if it pulls the trigger really, really slowly, it won’t blow the head off the global economy, but that is not how triggers work.

“The Federal Reserve signaled it would keep short-term interest rates near zero at least until midyear, while also setting the stage for tough decisions in the coming weeks about whether it should wait even longer.”

~ Jon Hilsenrath, Fed mouthpiece and apologist from the Wall Street Journal

Tough decisions about waiting longer? Every time somebody passed wind the Fed used it as an excuse not to raise rates. Some metric of economic activity went south, it waited. Domestic markets began to correct, it waited. Foreign markets began to correct, it waited. Inflation stayed below the arbitrarily and ludicrous 2% benchmark, it waited. Tom Brady deflated his balls, it waited. A Bloomberg headline noted, “Traders are betting that policy makers won’t be able to raise rates this year without disrupting stocks and bonds.” I don’t remember Volcker worrying about disrupting stocks and bonds. The current Fed is worried about all asset classes in all countries. Its concern about everything is some serious self-imposed mission creep. Meanwhile, it’s pushing bankruptcies and recuperative liquidations into the future, hoping the spiking PSA levels and bloody stools will go away.

All stupidity aside, the Fed claims to be data driven, but its monetary policies are really opinion-driven—making shit up in real time. Official numbers were cited as evidence of recovery—referred to as a fragile recovery to justify inaction. The recovery does seem both weak and fake (see The Economy and the Next Recession). I hasten to add, however, that I also believe that the poor recovery is the Fed's fault, and that the Fed has no real (constructive) control over the economy whatsoever. But don’t listen to me; let’s hear from some Fed detractors with gravitas:

“The Fed’s unconventional monetary policies have also created dangerous risks to the financial sector and the economy as a whole.”

~ Martin Feldstein, Harvard University

“The cost I was worried about was the longer-term cost of unraveling all of this.”

~ Charles Plosser, former president of the Philadelphia Fed

“You have to be extremely concerned with what’s going on. . . . There is no question that the Fed did hold it up there, but I think now the time has come to stop the medicine, and I think it will happen. It will stop.”

~ Carl Icahn, head of Icahn Enterprises

“In the past seven years central banks have conjured more than $10 trillion of digital wampum. Still, prosperity eludes them.”

~ James Grant, founder of Grant’s Interest Rate Observer

“I believe if monetary policy is too accommodating for a very long period of time it can be destabilizing . . . I fear we’re seeing that again. . . . The time has come. I hope it’s not too late. It needs to be done very slowly, very gradually, but yes they need to do it.”

~ Sheila Bair, former head of the FDIC

“They don’t understand the treacherous path they are going down . . . Those guys who run these companies are borrowing money very cheaply . . . they are buying back stock or even worse, making stupid takeovers.”

~ Carl Icahn on the Fed

“Federal Reserve [actions] will have disastrous long-term consequences . . . In an era of peak debt, the only thing zero interest rates achieve is create an enormous incentive for Wall Street to gamble more and more recklessly.”

~ David Stockman, director of management and budget under Reagan

“The market is going to say ‘oh my god, we’re so far behind the curve’ and force an adjustment that is going to be wrenching . . . [the Fed] has almost no credibility . . . the market is going to take the Fed and the Treasury curve to task in a very painful way.”

~ Lawrence Lindsey, former Fed governor

“I am looking at a bubble that is almost sure to pop at some time, and I don’t know when it’s going to happen, but I know it’s going to happen . . . I don’t think it’s at all ridiculous to think of a selloff like we saw in 2008.”

~ Julian Robertson, former head of Tiger Management Corporation

“Our monetary policy is so much more reckless and so much more aggressively pushing the people in this room and everybody else out the risk curve that we’re doubling down on the same policy that really put us there.”

~ Stanley Druckenmiller, former head of Duquesne Capital

“The Fed’s quantitative easing lowering the real rate of interest has been responsible for the rise in P/E multiples . . . and when rates normalize, that will reverse . . . we can’t argue that we are extremely overvalued in the marketplace.”

~ Alan Greenspan, some guy on CNBC

“The Fed is a monument to the corporate state. Contrary to basic American values of freedom and democracy.”

~ Chris Whalen, former editor of The Institutional Risk Analysis

“If you reduce the cost of capital you increase your use of fixed assets and you take out jobs . . . So one of the very sad negative characteristics of the Fed’s policies is it’s leading to job destruction.”

~ Ken Griffin, CEO of Citadel in 2013 . . . and then he hired Bernanke

“The persistence of extraordinary policy accommodation in a financial system flooded with liquidity poses a great danger.”

~ Stephen Roach, Yale and former director of Morgan Stanley

“Fed chatter is akin to reading the lyrics of a James Brown song—don’t make no sense.”

~ Grant Williams, RealVisionTV.com and Vulpes Investment Management

The Fed spoke with a single unintelligible voice under Alan Greenspan. It now resorts to a Chorus of Garble. The Fed will say the darnedest things. It makes you wonder why Krugman isn’t a Fed governor:

“We are going to be changing monetary policy from the most extremely expansionary we’ve been able to do in all of history to an extremely expansionary monetary policy.”

~ Stanley Fisher, Fed vice chairman

“We'll be able to make a move, but we don’t have to make a move.”

~ James Bullard, president of the St Louis Fed

“What worries me is how totally lazy investors have gotten, totally dependent on the Federal Reserve, and I find this to be a precarious situation.”

~ Richard Fisher, Fed governor

“The economy has improved considerably; that’s why we need to continue the extraordinary measures we’ve been implementing.”

~ Janet Yellen, chair of the FOMC

“The decrease in labor force participation among prime-age individuals has been driven mostly by the share who say they currently don’t want a job.”

~ Atlanta Fed

“How much has Twitter contributed to productivity? Seems like it does.”

~ James Bullard, ignoring Collum’s Law

Monetary policy marches forward based on what seem to be some pretty silly constructs. The 2% inflation target is an arbitrary number that some feel is more than 2% too high. The notion that 12 bureaucrats should be setting the price of the most important commodity of all—the price of capital—seems utterly absurd. Those who say the Fed doesn’t set rates should explain to me what the Fed is doing. The artificially suppressed rates are marketed as a great opportunity for everybody to borrow money and build stuff (government included), but it begs a basic question: which poor slobs are failing to collect a decent return on their capital to pay for this largesse? OK. That was a rhetorical question. The Fed governors deny that the loose monetary policy is the source of wealth inequality; they are either clueless or liars. The Fed’s world view ignores the consequences of the financialization of an economy—turning the primary function of an economy into simply moving money.

“A similarly confused criticism often heard is that the Fed is somehow distorting financial markets.”

~ Ben Bernanke, former head of the Las Vegas Fed

I should subtitle the following rant, “The Fed Buys the Farm.” The Fed seems to have this notion that if it drives up asset prices, it will also drive up asset values and make us all (or at least somebody) wealthier. Imagine the economy is like a farm. This particular farm not only raises livestock and grows produce but also makes things and provides services. It is still basically a farm. The Fed’s model seems to be that if you increase the assessed value of the farm through inflation, you will be wealthier. Call me silly, but I doubt the price tag on the farm influences its output, although it will crank up the taxes. Of course, the farmer could sell the farm to some nouveau farmer wannabe for a tidy appreciation, but now the newbie just got a lousy deal. It’s a zero-sum game. One bad season—maybe a drought if the farm is in California—and that over-leveraged rookie sod-buster is wiped out. Are we really wealthier based on a higher assessed value of our farm? Are we really wealthier when the prices of equities, real estate, and bonds are driven higher? What farmers know and city slickers don’t is that if you don’t make it, mine it, grow it, or service it, you ain’t creatin’ wealth, son.

“The rules when I was there were you don’t talk to anybody about anything that could be used for commercial purposes.”

~ Ben Bernanke on Fed leaks

The Fed got itself in a little bit of hot water when it leaked inside information to money managers. The Fed has a history of leaks. Ahead of an FOMC meeting in 1996, a Reuters reporter quoted an unnamed senior Fed official in a story that identified how many of the regional Fed presidents wanted to raise a key interest rate.¹⁸³ In 2010, ex-Fed governor Larry Meyers provided Fed minutes to his clients two weeks before they were supposed to be released.¹⁸⁴ This year the Fed released minutes in June by mistake, five years ahead of their projected publication. The big one, however, was when Janet Yellen met in 2011 and 2012 with a representative of Medley Global Advisors. Soon thereafter, Medley projected Fed actions to its clients 24 hours in advance of the press release.

“The Fed needs to be audited to see if its ruling body has broken the law by manipulating financial markets that are outside its jurisdiction. A thorough investigation of the Fed will show once and for all if its former chief Ben Bernanke and current chairwoman Yellen should go to jail.”

~ John Crudele, New York Post

A shitstorm commenced. U.S. prosecutors launched an insider trading investigation into the leak. Soon Congress was involved, with Jeb Hensarling leading the charge. Hensarling subpoenaed information, the Fed said, “no way,” and Hensarling said, “yes way.”¹⁸⁵ It got interesting, however, when Pedro da Costa, a determined reporter from the Wall Street Journal, got into it. Pedro had already hammered Bill Dudley for providing an interview to people behind an expensive paywall.¹⁸⁶ He had given Janet Yellen some lip at a December 2014 press conference about “Segarra tapes, the Beim report, and most recently the revelation that a former New York Fed official was exchanging information with someone at Goldman Sachs who also had New York Fed connections.”¹⁸⁷ Pedro even asked, “Do you see the New York Fed as a black mark on the Fed system because of these recurring scandals?” Boom! But it got real at a post-FOMC meeting press conference with this testy little exchange:¹⁸⁸

da Costa: I want to know if you could tell us who are these members of the FOMC who struck down this investigation? And doesn’t not revealing these facts kind of go directly against the sort of transparency and accountability that you’re trying to bring to the central bank.

Yellen: That is an allegation that I don’t believe has any basis in fact. I’m not going to go into the details, but I don’t know where that piece of information could possibly have come from.

da Costa: Is there a sense in the regulatory community that financial crimes need to be punished sort of more forcefully in order for them to be—for there to be an actual deterrent against unethical behavior?

Yellen: Only the Justice Department can bring criminal action, and they have taken up cases where they think that that’s appropriate. In some situations, when we are able to identify individuals who were responsible for misdeeds, we can put in place prohibitions that bar them from participating in banking, and we have done so and will continue to do so.

It was Zerohedge who noticed that Pedro was absent at the next press conference, seemingly replaced by Fed pawn Jon Hilsenrath.¹⁸⁹ The Free Pedro campaign commenced on Twitter. (I can’t recall whether I started it, but I certainly led some charges.) When I asked Pedro if the Fed had in fact banned him from the Yellen press conference, he said it was actually his editor's decision to take him out, even though he had attended every presser since they were launched during Bernanke's tenure. No reason was given. A few months later, Pedro had left The Wall Street Journal to work at a Washington think tank.¹⁹⁰ That, folks, is called access journalism. If you press the Fed, you won’t be invited back. The Wall Street Journal was offered an opportunity to define itself—to show its stuff—and indeed it did. Pedro threw some aggressive Tweets about the Fed’s “potentially criminal leak,” including calling on his peers to ask the tough questions in his absence. They went silent. Apparently his peers liked their seats at the press conference more than their right to defend the First Amendment. A few weeks later at the Humphrey-Hawkins speech, Yellen got just a little more guff before the trail went cold:

“You did nothing. You're so concerned about bringing the leaker to the forefront that what will you do? Nothing! . . . if anyone is trying to sweep this under the rug, it’s the Fed.”

~ Representative Sean Duffy to Janet Yellen

We’ll wrap my annual Fed bash with a little housekeeping. The big news is that Bernanke got a real job. He actually got two jobs: one at Pimco and the other at Citadel. As the world’s most gigantic bond trading firm, Pimco makes sense in the world of revolving doors and paybacks. That’s just a big sloppy kiss. The job at Citadel—a firm known for high-frequency trading and being the receiver of wrath from detractors like Eric Hunsader—is less obvious. Eric’s theory is that Bernanke might prove useful if Citadel finds itself in court. Ben also penned a book that may paradoxically be profitable, ill-advised, and, I’m told, poorly written. It starts out with a bang in the title: Courage to Act. A bit narcissistic, don’t ya think? Then he manages to bring into the harsh light of day details about his role leading up to and during the financial crisis, which had remained in the shadows—even Sorkin couldn’t get squat out of him in Too Big to Fail. I probably will read it, but I do not have the stamina yet.

“Panic is what created the crisis.”

~ Ben Bernanke

Schiff: Look, I gotta let you know—full disclosure—I’m probably your biggest critic.

Bernanke: Well, you got a lot of competition.

No, Ben. The Fed created the crisis with interest rates that were too low for too long. Everybody else on the planet knows this. The panic was a consequence of the crisis. But now it’s Janet’s turn to screw the pooch, and the early returns say she may do some real damage before returning to the Shire.

Baptists

In this section I present quotes from guys who I believe have some grasp of the world around them. Some are funny or at least pithy. Others carry wisdom. They are the antidotes to the bootleggers.

“Again, since I’m not an economist I really have no idea what the wrong solution is.”

~ @RudyHavenstein

“Our industry is full of people who are famous for being right once in a row.”

~ Howard Marks, founder of Oaktree Capital Management

“Whether it’s QE in the West or China’s recent regulatory intervention in the aftermath of the bursting of its equity bubble, market manipulation has become global in scope…The more we depend on markets, the less we trust them . . . what we really want are markets that operate only on our terms.”

~ Stephen Roach, Yale University and former executive director of Morgan Stanley

“The long-term consequences of global QE are likely to permanently impair living standards for generations to come while creating a false illusion of reviving prosperity.”

~ Scott Minerd, Guggenheim’s Global chief investment officer

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2015 Year In Review (Part 2)

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Banks and Bankers

The Fed

Baptists

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