Timely Appearance on CNBC

This video was aired on CNBC Airtime: Tues. Sept. 22 2009 | 5:35 PM ET.

I believe this video is timely. Secondly it is the first "voice" to hammer home in a concise argument that the US market is in a cash infused bubble. I loved Simon’s comment about JP Morgan BEFORE CNBC CUT THE VIDEO where he actually said something to the effect “What on earth justify you guys recommending JP Morgan at $44 a share?”. In other words a very pointed question. Instead CNBC put up an S&P Chart on the screen as “filler” which is very funny. Why did CNBC feel so strongly about his question and the way he asked it to cut the actual wording out? It is easy, Simon Hobbs was not on board with the US Government and Media PR campaign doing everything it can to push sentiment and the markets higher. There is a real PR war on the American Citizen going on now that is very “Big Brother” like.

It is also pointed today that the Consumer Confidence numbers came out with a big jump. Funny the consumers are more “confident” but in the same breath the report says,

"Confidence rebounded in early September as consumers increasingly expected the economy to improve despite their reluctant conclusion that their own financial situation would remain quite problematic for some time,…”

So is it not comical that consumers expect the economy to improve but not their own finances? Do they not realize they are 70% of the economy? Perhaps the PR Machine is doing it’s job making “consumers” (Why don’t they say “citizens”?) feel like the world is getting better even though they look in the mirror and still see the black eye…

AIG and Attitude

I came across this comment from "White House Economist" off the Dow Jones Newswire today referring to an article in the Washington Post.

I find it objectionable that AIG has a new CEO with anywhere near the attitude he has. I don't care if the guy thinks Washington is clueless about business or esp. running his business. On this front he is more than likely correct. It is very unfortunate we (the American Taxpayer) own 80% of the blasted company. I would prefer we own 0% and have never owned any at all and don't give a darn if AIG would have imploded. Personally I think it did not implode because of the number of "well connected" wealthy bank running CEO's and "investors" that would have lost a fortune if it did called their "friends" running the Treasury and said, "Bail out AIG or we will loose a fortune". So the American Taxpayer paid to make sure that Goldman Sachs can pay it's employees $700,000 in bonuses each this year.

Besides the fact this is the biggest financial crime ever perpetrated against the American people, mind you done without any approval from our impotent legislators, the guys running the show at AIG should have better taste than say such things in public about the idiots in Washington. I mean how many people in the entire Government are qualified to run a sprawling 100 + country "insurance" operation, let alone all the other crazy divisions they own? There are not many people in the world that understand AIG enough to "run" it.

Obviously Hank Greenberg was running an operation with "Enron" financing. It has been reported he was moving money around to skirt the US regulators (Partly allowed because of the arcane and completely outdated insurance regulation in the US which is still state by state and completely out of touch with the fact that the industry is national and international in scope) and pad his accounts to hide the billions of dollars in risk and losses he began to accumulate when they kicked him out over one reinsurance deal which was caught.

Hank still gets "answers" when he make calls to Washington and as far as I can tell he is a one man lobbying effort right now to "save" his old company. He has said himself "all of his wealth" is tied up in AIG shares (though he sole enough to pay some bills) and he obviously thinks he can influence "Washington" to loosen up credit terms and allow AIG five years or so to "unwind" loosing positions and rescue the company's balance sheet.

It is not going to happen. AIG should be "gone" as we know it and unfortunately, not unlike the "bad banks" the Chinese created after bailing out their banking industry about a decade ago, the American Taxpayers will NEVER see the $160 billion sunk into the company. This is reality. But the bankers, hedge funds and other "investors" that benefited from the taxpayer bailout "got theirs" and they are living large off what is left of the crumbled institution's lousy contracts.

Shame. Mr. Robert Benmosche should be fired. AIG wound down, sooner rather than later.

Thank you Congressman Mike Castle

Here is a link to the outline of Mike Castle's proposal to create a regulatory agency to regulated "financial markets" and hopefully remove ALL Fed Reserve and Treasury oversight of financial markets because they are incompetent. His link is here.

Here are the details:

Details of the Legislation

FSSRA calls for the creation of an independent Financial Stability Council (FSC), composed of representatives from existing federal financial regulators which now have the responsibility to oversee portions of the financial system. The FSC will serve as a “systemic-risk monitor,” and would maintain comprehensive oversight of potential systemic risks to the financial system. It would have the ability to propose changes to regulatory policy, working with existing federal regulatory agencies, when systemic risk could emerge due to regulatory gaps or the emergence of risky new financial products. The FSC would also have the authority to close regulatory “black holes” that pose a systemic risk when risky products or activities fall outside the current authority of federal financial regulators. The FSC would also have the authority to adopt rules that ensure financial institutions do not grow “too big to fail,” by imposing different capital requirements, raising risk premiums, or requiring a larger percentage of debt be held as long-term debt.

Additional provisions in the FSSRA would:

· Close the credit default swaps loophole to ensure oversight of a financial instrument that contributed heavily to the current financial crisis and the downfall of AIG. This regulatory gap allowed systemic risk to build in our financial system without the oversight and transparency needed to prevent a collapse;

· Impose safety and soundness requirements on new investment banks by requiring them to organize under the Bank Holding Company Act. Under the current system, investment bank firms such as the Bear Stearns and Lehman Brothers were left unregulated with no agency given the authority to examine the full scope of their operations;

· Merge the Office of Thrift Supervision (OTS) and Office of the Comptroller Currency (OCC) to consolidate and reduce the number of banking regulators, improving the effectiveness of the entire system. This merger was recommended by many experts, and the Treasury Inspector General recently raised concerns about the objectivity and effectiveness of OTS;

Thank You Mary Schapiro

This is from Marketwatch today, read here:

Over-the-counter derivatives should be regulated the same way as the commodities or securities they are based on, said Securities and Exchange Commission Chairwoman Mary Schapiro on Tuesday..."Congress should consider modifying the [Treasury Department] proposal so that all securities-related OTC derivatives are regulated more like securities; and commodity and other non-securities-related OTC derivatives are regulated more like futures," Schapiro said...

Now someone is talking. These products need to be regulated. They need to be traded on transparent exchanges and adequate collateral requirements applied.

I also am in agreement with a recent proposal by Delaware Congressman Mike Castle to create a powerful financial regulator that is NOT in any way associated with the Fed. The Fed should have had all of it's board fired after the collapse of the financial system / credit markets. Anyone with half a brain knew what was going on and these guys let it all happen under their watch and should have all been fired and Bernanke should not have been reappointed. Some of these guys on the governing board could be investigated with criminal wrongdoing in bailing out some of the Wall Street firms they bailed out without congressional oversight.

Congressman Sessions Complains about Student Loan Changes

Hi Congressman Sessions,

I want to remind you of why the Democrats are voting to remove the "private" option for student lending. You wrote in your news letter:

In 2006, FFELP was overwhelmingly popular with schools and students, accounting for more than 80 percent of the student loan volume. Sound familiar? This mimics much of the satisfaction with the current health care delivery system. But yesterday, the Democrat-controlled House of Representatives voted to eliminate FFELP provided by private lenders, which have enabled over 200 million loans to college students totaling nearly $800 billion. The result: a government-takeover of the student loan industry.

One would only have to do a rudimentary search on the issue of student loans in the past 5 years to find out how corrupt the "private" portion of the lending had become with major kickbacks to University personnel for favoring one lending institution over another, negotiated high fees for originating loans, "loan steering" by University personnel of students to "preferred high fee loans", all the way to the reckless "investments" into consumer debt backed securities by Sallie Mae which nearly bankrupt the company. There was so much corruption from the financial institutions taking advantage of the "private / public" partnership in student lending there was left only 2 options:

1) terminate all government backed student lending (which in the current credit environment would be a catastrophe)
2) remove the corrupt, kickback laden, reckless securitization and expansion into direct risky consumer lending (due to the ability to make mounds of money securitizing these risky loans in the credit boom up to 2006) of the "private" lenders.

At this time number 2 has won out.

Instead of bashing the current decision, I would like to see you come up with a new bill allowing "private" lending in this area again [and soon] that would put in place a host of "protections" that would make sure the kind of shady lending practices that were happening would not happen again and would make sure the "student lending" programs backed by the government STAYED "student lending" and not become reckless unsecured lending just to send pooled loans to Wall Street where millions could be made selling and creating derivatives off of these products.

Sincerely,

Patrick Henry

Treasuries Fall Auctions Loom

Any Surprise that Friday before next week's Treasury Auction the rates are up significantly? Should not be. The Fed's decision to keep pre-announcing it's auctions has and continues to give the "Primary Dealers" in the market the ability to push up interest rates prior to the auction (pushing down the price) then miraculously after the auction, rates drop back down (with prices on the debt going up) allowing the 18 primary dealers required to bid at Treasury auctions to rake in easy profits.

I am very disconcerted by this practice ever since I first read about it some months ago. It is an absolute travesty that our government, the Fed and Treasury continue to feed the profits of a bunch of insolvent institutions on the backs of the taxpayer and now on the backs of other investors.

Of course you have seen the percentage of buying of these offerings by so called "indirect bidders" increase by a factor of 4 since late 2008. My unscientific findings of the percentage of uptake by "indirect bidders" are thus:

Last 3 months of 2008 = 15%
Jan 09 = 18%
Feb 09 = 24%
Mar 09 = 33.5%
April 09 = 38.5%
May 09 = 37.3%
June 09 = 43.8%
July 09 = 54%
Aug 09 = 62.5% (a Record)

It is nice to know the world of "indirect bidders" is not ignorant. They see "free money" and are taking an increasingly large portion of initial offerings. Are they then selling this supply back to the market for a quick profit? Are they being seduced into taking the product with guaranteed short term profit margins? Is it possible that no matter what is going on now that eventually the free ride will end and ultimately nobody will want to own the massive supply of debt being put out there right now?

I don't know the answers to these questions but I do get the sense that what the Treasury is doing is purposefully padding the profit margins and accounts of anyone who wants to "play" in the auctions. What their multiple motives are, I don't know. What the result is... Big short term profit margins, big short term commissions, big short term pay and bonuses for insolvent institutions, yes a BIG PAY DAY EVERY MONTH FOR THE SAME INSTITUTIONS THAT ARE SUPPOSED TO BE UNDER SUPERVISION AND WE ALL KNOW ARE INSOLVENT.

Yes, this is just another candle in the eye of the average American for the gain of institutional players on the "Wall Streets" of the planet... For now.

Here is a nice chart from the Treasury from previous years:Bidder Category Purchase Shares for

All Treasury Securities

Category	Mean	Standard Deviation	Minimum	Maximum
Primary dealer	70.9	14.6	33.6	100.0
Direct bidder	2.4	3.6	0.0	31.6
Indirect bidder	21.6	12.7	0.0	64.8
Noncompetitive	5.1	4.7	0.0	16.8

Source: Author’s calculations, based on data from the U.S.
Treasury Department.

Note: The table reports descriptive statistics of bidder category
purchase shares in percent for all 576 U.S. Treasury security
auctions between May 5, 2003, and December 28, 2005.

No Insider Trading Rules?

I found the information in this article useful.

It appears there are no "insider trading" restrictions within the CFTC regulations except with respect to employees. Is there any wonder why all of the products "created" over the past few years have been products NOT traded on any open exchange?

From the article bit below...

Participants also debated concerns about harmonization when it came to insider-trading prohibitions.
Annette Nazareth, a former Democratic SEC commissioner, said she wants to see such prohibitions when it comes to commodities futures, modeled after how such restrictions exist in the securities market.
"The Commodity Exchange Act generally contains no such ban, other than for CFTC and market employees, largely because one of the historical functions of the futures markets was to permit hedgers to protect themselves against risks to the commodity positions based on their own knowledge of those positions," Nazareth said.
However, the CFTC's Chilton said he "wasn't so sure" about bringing the insider-trading ban to the commodity futures regulator.
CBOE's Brodsky said both agencies could impose insider-trading restrictions so long as a particular rule on insider trading applies only to a particular product and not broadly across all sectors.
Some officials testifying expressed concern about whether insider-trading prohibitions should apply to broad-based indexed products as opposed to individual products.
With lots of derivatives, Brodsky said, there is no transparency or reporting requirements, giving many investors the opportunity to do a wide variety of insider trading.
CFTC's Gensler pointed out that the agencies as well as the White House and Congress are working on legislation that would bring these products, both over-the-counter and exchange-traded, under regulation. "We are working on record keeping, reporting and other regulations for derivatives," he said.
Clearinghouses
Clearinghouses, which are intermediaries between buyers and sellers, should have agreements among themselves, based on a common set of principles agreed to by the agencies, so that no problematic products slip through the cracks, said Anthony Leitner, director at A.J. Leitner & Associates.

I especially like the remark by Anthony Leitner. It reminds me of the remarks by Bernanke and Paulson when they started in their new jobs while still having their feet in their prior ones where they suggested point blank that the banking industry was sophisticated enough to gauge its own risk profiles and thus could create it's own guidelines and needed little "meddling" from the Fed or government as to how to manage risk capital ratios. These words were being spoken as the entire financial system was stretched over 30-1 and beginning to implode in 2006.

Bank Bonuses

Until about now I have had little opinion of the bonuses banks pay out to the people who make money for them. In fact, with respect to Merrill Lynch, I felt the "retail brokers" should get whatever performance bonuses they deserved as long as the cash was in the bank, if for only the reason they had little to do with the risky undertakings of the firm's high profile traders who gambled with the firms own and borrowed capital and lost miserably.

Now, however, I am inclined to get very pissed off when thinking about not only the bonuses being paid by these financial firms but at the exceptional trading profits being made on the backs of the taxpayer through our direct support of financial firms through TARP and the indirect but just as risky support through the FDIC backed loans (TALF) companies are floating at dramatically subsidized interest rates that taxpayers are ultimate responsible for.

To have had the Fed and Treasury spend and allocate several (one estimate is $12 Trillion) trillion taxpayer dollars to "shore up" what is essentially a pool of financial firms that are technically insolvent and then to see the folks running these firms still with the mindset to rake out as much cash from the system as they can, while they can, is an insult to their profession, shows a complete lack of respect for the trauma they caused not only the global financial system but to the lives of at least a billion people who have been financially crushed by their reckless, unregulated activities over the past 10 years (well the latest 10 years in this case),is a travesty.

If I were in any decision making power, I would gather some economists together and apply "market reality" metrics to each one of these firms. I would invite them to a nice lunch where I would spell out in no uncertain terms, they are insolvent, they are not making any money above the losses still on their books and will not likely to be truly "profitable" for 2-3 years as they work off the dead assets. If they have "profitable" divisions (like Citi owning a trading arm that made a killing) they will make it clear to the folks that work there, they work for a government subsidized failed banking firm and they will not be paid bonuses until the entire firm can show "real" profits overall in the firm.

If this does not work for these folks, then those people should leave the bank or the division split off so those folks can continue to run their little profitable firm with the bank holding a minority stake.

The bottom line is the model of large conglomerate banking enterprise does not work. This was sorted out in 1934 and the reason they do not work is you CANNOT HAVE TAXPAYERS BAILING OUT LARGE UNWIELDY FIRMS JUST BECAUSE ONE COMPONENT OF THE FIRM IS RETAIL BANKING. Retail banking, with its FDIC assurances should NOT be combined with other kinds of investment banking, finance, insurance etc. This is well known.

Just like the Enron disaster, where a few guys get together to take over a large regulated (at the time) firm with stable cash flows they could heavily leverage and turn it into a crazy speculative monster and lead it to bankruptcy, the same folks that run investment banks and other financial gambling oriented firms love to get their hands on retail banks for their stable deposits, fee income and seemingly unlimited access to cheap capital.

This should not be allowed. Period. We need to go back to Glass-Steagall Act and separate the various financial businesses for GOOD!

See latest story on banking bonuses from EU remarks today.