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Monday, June 25, 2012

Weekly Forecaster

Bankers Arrested! Iceland
by James Corbett
23 June, 2012

Last week in these pages we forecasted: that a pro-bailout party would win the Greek election; that the socialists would take a majority in the French elections; that Spain would require a significantly larger bailout to prop its banking sector up; and that the Fed would likely extend Operation Twist as a way of keeping everything moving along sideways. Check, check, check, and check. In most areas of life, 4 for 4 is something to be happy about, but when forecasting during the death throes of the global economic system as we've known it, getting things right is hardly cause for celebration.
Here's a prediction I'd like to see come true: the American public, finally realizing the extent of the depravity on Wall Street, will start to examine what really happened in the past five years. Following the trail of trillions in bailouts and stimulus funny money to the same groups of banksters and treasurers who created the housing crisis in the first place, the public will see through to completion the criminal investigations and prosecutions of the criminals behind the subprime loan fiasco, the too-big-to-failouts, the mortgagegate scandal, the quadrillion dollar derivative black hole, and all the other frauds that have been pulled on the people of the US and the world in general over the past five years. After which, the path will be clear to the discovery of the deeper truth behind the economic charade: the rigging of the markets via the President's Working Group on Financial Matters; the control of both political parties by the same banking factions; the funny money dollar propped up by nothing more than the promise of the labor (and taxes) of future generations. One can always dream...
By any reasonable standard we should already be well down the path to reaching that prediction. The latest outrage? A US Government Accountability Office audit showing how Fed board members funneled over $4 trillion in emergency Fed funding to their own banks and businesses at the height of the 2008 meltdown. The funds in question included near-zero interest rate loans as well as other financing, and went straight from the Fed's coffers to the likes of JP Morgan, Goldman Sachs and GE. The problem? JP Morgan's CEO, Jamie Dimon, was on the board of directors of the New York Fed when the Fed decided to use JP Morgan as a clearinghouse for emergency funds, granting it access to some $391 billion including $29 billion for the acquisition of Bear Stearns. Goldman Sachs board member Stephen Friedman was the chairman of the NY Fed even as the Fed granted Goldman bank holding company status and access to cheap Fed loans. Yet another NY Fed board member, Jeffrey Immelt, was coincidentally the CEO of General Electric at the same time that the Fed provided GE with $16 billion in emergency fund financing. Can we spell conflict of interest? Evidently the Senate can, as evidenced by the Federal Reserve Independence Act, which seeks to ban employees of Fed-regulated companies from sitting on the Fed's regional boards. All of this may sound hopeful, but given that this conflict of interest has been built into the Federal Reserve system since its inception 99 years ago, one wonders what's taken the Senate so long to get around to “correcting” it. That's a rhetorical question. Of course, no one will so much as lose their bonus over the whole affair because the public that should be outraged about this is busy with more important matters, like the NBA playoffs.
And so it is with so many of the scenes that have unfolded in Washington and on Wall Street since the Greenspan-spun housing bubble popped and the unraveling of the derivatives-fueled shadow economy began in earnest. The bankers help themselves to more and more of the trough on the taxpayers' dime and the public allows it to happen. With each iteration the lies become more brazen: the threats of martial law if the bailout didn't happen; the robosigning scandal; MF Global; the JP Morgan silver and gold futures manipulation; and now the conflict of interest scandal. The public, it seems, now fully recognizes that Congress intends to prosecute steroids in baseball much more aggressively than they will ever look into Wall Street malfeasance, and worse yet, they seem resigned to that fact. This is why it's so difficult to predict that the public will rise up and begin to demand accountability; it's difficult to imagine how much worse things have to get before people stand up to the bankers.
And yet, just because it's not happening doesn't mean it can't happen. Witness what's happening in Iceland. Earlier this month Iceland's Supreme Court handed down a four-and-a-half year sentence to Jon Thorsteinn Jonsson and Ragnar Zophonias Gudjonsson, two former executives at Iceland's Byr Savings Bank. In 2008, just before the bottom fell out of the Icelandic banking system, the pair used their positions to approve an 800 million kronur loan from Byr to Exeter Holdings ehf. That loan was used to buy out Jonsson and Gudjonsson's shares in Byr, which were then put up for sale as collateral to guarantee the loan itself. Now the pair are preparing to spend the next half a decade behind bars.
And the Icelanders didn't stop there. Earlier this week Olafur Thor Hauksson, the special prosecutor investigating the misdeeds of the Icelandic banking crisis, confirmed more arrests and raids. One of those scooped up was Jon Thorsteinn Oddleifsson, the former treasury boss of Landsbanki. Three others from Landsbanki were arrested, and raids and searches were conducted at MP Bank, Straumur (now ALMC), and even the central bank itself. All of these banks are under investigation and more arrests are expected.
Haven't heard about Hauksson, or the Jonsson and Gudjonsson convictions, or the prosecutor's office's raid of the Icelandic central bank? Now why would that be, I wonder? It's almost as if the media would prefer the public didn't hear about the round-up, prosecution and conviction of once-powerful bankers, lest they get any ideas for their own political context. Imagine that.
Still, all hope is not lost for the beginning of the Great Banker Round-up of 2012. It seems a significant-but-underreported financial corruption case has just broken through to the mainstream. Is it MSNBC breaking the story? Bloomberg? The New York Times? Hardly. One of the “respectable” institutions across the pond, then? The Financial Times? The Economist? Nope. It's Matt Taibbi of Rolling Stone. He has an in-depth write up on USA v. Carollo, Goldberg and Grimm, a tale of three GE Capital employees who were just convicted for their part in a scheme that the big boys of Wall Street have been using to rip off towns and cities across America for the past decade. In short, the defendants (Dominick Carollo, Steven Goldberg and Peter Grimm) were convicted of rigging the bids for municipal bond auctions, engineering fake auctions where pre-arranged winners were allowed to see the other bids and adjust their offer accordingly. The three defendants in this case were just the tip of the iceberg, and several other banks were found to have taken part in the scam. What's interesting is the way these three were caught: they discussed the bid rigging openly in phone calls that they knew were being recorded by their own companies. There comes a point when corruption is so endemic in a system that criminals forget that they can be prosecuted (let alone convicted) for crimes they are committing out in the open. It should surprise no one that Wall Street reached that point long ago. It should also surprise no one that it took a rock'n'roll music man to tell the American public about a case that the MSM business media wouldn't touch with a ten-foot pole.
The moral of the story? Steal a hundred dollars from a cash till at a convenience store and you'll be locked up for years, and well you should be. Swindle cash-strapped towns and cities by skimming untold billions off the top of the municipal bond auction market in coordinated bid-rigging with some of the biggest players in finance in a scam lasting over a decade, however, and three of the low-level participants might end up with a conviction and a few years behind bars...if they were dim-witted enough to engage in that bid-rigging openly in knowingly recorded phone calls. If this does not instill confidence in the inherent justice of the American “justice” system, you're getting the idea. If it makes you question the priorities of the American public that 99.9% of the public has never even heard of the case, much less care about it (just ask the person behind you next time you're waiting in line at the supermarket check-out if you don't believe me), then perhaps you're beginning to get the underlying point.
If it's difficult for the public to even conceive of these crimes as crimes, perhaps it's a result of the sheer grandiosity of the crimes in question. Stalin famously said “one death is a tragedy; one million is a statistic.” The same applies to fraud. Ripping off your friend is a crime. Ripping off thousands of towns and cities across the country to the tune of billions of dollars over the course of a decade is a “regrettable trading practice.” Is this likely to change in the near future? Are we likely to see the floodgates open and the prosecutions commence in earnest? A special counsel appointed to start raiding and searching the offices of the Fed? The CEOs of major banks placed under arrest? Assuming you require an answer at all, I will merely point you to the current Attorney General and the ongoing Fast and Furious scandal for an idea of just how committed the Department of “Justice” is to living up to its name.
And so Wall Street will continue along in its sprint to the finish line of the takedown of the American economy, crying foul over the Moody's downgrading even as billion-dollar scandal after billion-dollar scandal continues to emerge. Economies around the globe will continue along in a similar vein, with similar tales of increasingly brazen abuse and corruption. The EU will continue its song and dance, trying to convince the world that the Spanish banks will “only” require another 50 to 80 billion Euros to meet capital shortfalls in a worst-case scenario (it's actually over 100 billion). The Asian markets will tumble as the once-mighty Chinese economy begins its slowdown.
And underneath it all, behind the headlines and out of sight of a largely apathetic public, more schemes, scams, and frauds will be hatched, many in the plain light of day because this is how rampant the corruption is now.
And yet, in at least one tiny island nation way out in the North Atlantic, a special prosecutor is arresting bankers and raiding the central bank for clues to past financial crimes. We ignore that example at our own peril.
The Following written by Matt Gillotti
For the International Forecaster
On Wednesday Federal Reserve chairman Ben Bernanke said that a failure by Congress and the White House to effectively deal with the so-called fiscal cliff could significantly damage the US economy. As Bernanke spoke to reporters he warned that uncertainty surrounding the combination of expiring tax cuts and mandatory spending reductions set to take place at year’s end could cause a significant drag on US growth. Bernanke also said, “Financial Markets don’t like uncertainty.” The policy makers’ ability or more often inability to address the coming fiscal problems could severely affect key elements in our economic growth looking forward. With it being an election year the usual political jockeying that accompanies it is causing concern as to whether Congress and the White House will be able to come to an agreement.
As we see now the Federal Reserve has extended operation twist through the end of 2012 in what the Federal Reserve officials say they interpreted as heightened worries over the economy, as if prior to the extension of operation twist our economic standing was all peaches and cream. Along with extending the program and shifting their holdings toward longer term securities the US Federal Reserve officials noted that they are prepared to take further action if need be. As within the past the Fed’s most likely follow up action in which they will try to sure up the consistently floundering US economic recovery will be another bond buying program. With eleven out of twelve Fed officials voting to keep the central bank’s easy money policies in place the Fed as it has said since January that it will keep short term interest rates at exceptionally low levels through at least 2014. Here again we get to see more of the same from our highly trusted Federal Reserve officials in their continued efforts to prop up our extremely dysfunctional economy. With the extension of operation twist the Fed is expecting to buy and sell about $267 billion in treasuries, as they conveyed concerns over the economies weaker than expected economic data noting slowed growth in unemployment an elevated unemployment rate slower overall household spending than originally thought. The Fed through all its actions is still unable to ensure confidence amongst its citizens, which is the glue that holds together a fiat currency economy.
The US foreclosure activity increased by 9 percent in May, exceeding 200,000 for the first time in three months according to RealtyTree the leading online marketplace for foreclosure properties. The May 2012 foreclosure report covering foreclosure filings, default notices, scheduled auctions and bank repos, of the 205,990 US properties reported a nine percent increase from April was unveiled yet still down four percent for the same month in 2011. The report also showed that one of every 639 US housing units had a foreclosure filing for the month of May. As Brandon Moore CEO of RealtyTree was quoted as saying that the US foreclosure activity has now decreased on a year over basis for twenty straight months including May, but the jump in May foreclosures starts to show that it’s going to be a bumpy ride down to the bottom of this foreclosure cycle. With distressed homeowners still loosing their homes the pre-foreclosure home sales by the means of short sales and auctions to third party purchasers rather than the banks having to take over, maintain and manage the property along with marketing it for sale has helped the banks somewhat minimize their looses. Either way you look at it though the housing market is still more than “bumpy” and homeowners have still lost their homes due greatly in part to the continued poor economic status and rising unemployment here in the US. As we look forward at the US economic crisis along with high unemployment with the number being more realistically around 22 percent compounded by inflation it is hard not to see that these combined issues will not still be the straw that breaks the back of many a struggling American homeowner whose daily fight to keep their head above water will end in foreclosure.
In a recently released government report concerning loss of family wealth due to the recession the hardest hit age group were the younger households with an average age of 35 to 44 losing almost 60 percent of their wealth, with this age group struggling with mortgages, school tuition, and rising taxes. The US Census Bureau reported that the group aged 35 to 44 was the hardest hit of any age group. This beaten down bracket of young homeowners makes up a great majority of the middle class, with their biggest asset being their home and the huge drop in home values since 2005 it seems that this is the root cause of the high percentage of lost wealth. Although the percentage for older Americans, those 65 and older fared better with a net worth loss of thirteen percent over a five year period it is still a big pill to swallow considering the lost net worth due to fallen home values is beyond ones normal controls.

Dimon Spars With Lawmakers In U.S. House Hearing
J.P. Morgan Chase & Co. (JPM) Chief Executive James Dimon sparred with lawmakers of both parties Tuesday, as an appearance in the U.S. House proved far more contentious than one in the Senate last week.
Mr. Dimon faced tough questions about the bank's lobbying on derivatives rules, risk models and on whether the bank is so large and complex that it would be rescued by the government if it were to fail. Several lawmakers accused Mr. Dimon of being more focused on trading activities than on lending to consumers.
In response to questions from Rep. Sean Duffy (R., Wisc.), Mr. Dimon insisted J.P. Morgan wasn't too big to fail. Mr. Dimon said he didn't expect the bank to fail, but that if it did, that the bank would be dismantled. Any losses to the government should be charged back to the industry, he said.
Mr. Duffy tried to pin Mr. Dimon down on the size of the loss caused by the multi-billion dollar trading blunder disclosed last month, asking if it was fair to say that the loss was over half a trillion dollars or a trillion dollars.
"Not unless the earth is hit by a moon," Mr. Dimon said.
Rep. Maxine Waters (D., Calif.) pressed Mr. Dimon about the bank's opposition to a proposal for all trades made by U.S. banks, even those booked offshore, should be included under new rules. Mr. Dimon said that proposal would harm the bank's ability to compete overseas. The bank's customers "will go elsewhere if we can't give them the best possible deal," he said.
He defended the bank's lobbying activities as a "constitutional right," adding that "we have the right to have our voice heard"
Earlier in the day, bank regulators criticized a lack of risk disclosure at J.P. Morgan as hampering efforts to prevent the recent multibillion-dollar trading losses.
Comptroller of the Currency Thomas Curry on Tuesday told a House of Representatives hearing that the regulator is probing the level of reporting provided by J.P. Morgan's Chief Investment Office, the unit responsible for the bank's trading losses disclosed last month.
"In hindsight, if the reporting were more robust or granular, we believe we may have had an inkling of the size, the potential complexity, the risk of the position," Mr. Curry said. "What we're looking at on a prospective basis is to make sure there's a robustness to the reporting" and risk management, he said.
Mr. Curry acknowledged that the OCC only became concerned about J.P. Morgan's trading activities after press reports on the trades were published in early April.
The Federal Reserve's general counsel, Scott Alvarez, said that J.P. Morgan's managers "didn't have a good handle on the information and the understanding of the risk. Mr. Alvarez added that "we have to rely on the information that we get from the management of the organization."
Rep. Spencer Bachus (R., Ala.) the panel's chairman, said the J.P. Morgan trades highlight weaknesses in the current structure of financial regulation, which he called overly complicated. "Sitting before us today are five different regulators, all of whom have some supervisory responsibility over these trades and several of whom have examiners embedded at J.P. Morgan, but none of whom, apparently, was either aware of the bank's hedging strategy or raised concerns about it," he said.
Mr. Bachus also highlighted the need for banks to have strong capital cushions to absorb losses. "The most important lesson is how central capital is to the safety and soundness of individual banks and our overall financial system."
Rep. Barney Frank (D., Mass.), the panel's top Democrat, said the losses underscore the need for tough regulation of derivatives and criticized efforts by Republicans to roll back the Dodd-Frank financial overhaul law that bears his name. J.P. Morgan was able to withstand the losses, he said, but noted that many institutions aren't as strong.
"Not every institution has a fortress balance sheet," Mr. Frank said, echoing Mr. Dimon's often-stated description of his bank's finances. "Some institutions may have a picket-fence balance sheet or a chain-link fence balance sheet."
Beyond J.P. Morgan, Republican and Democratic lawmakers traded barbs about how each side responded to the financial crisis, years before the bank's losses. Rep. Scott Garrett (R., N.J.), scolded Democrats for having "no shortage of outrage" about the "London Whale" losses, but few complaints about the taxpayer rescue of mortgage giants Fannie Mae and Freddie Mac, or over loan guarantees given to bankrupt solar panel manufacturer Solyndra LLC. Rep. Michael Capuano (D., Mass.) shot back, "You must have missed the hearings that made me a movie star, Mr. Garrett."
Democrats blasted Republicans for trying to roll back Dodd-Frank, passed in 2010 in the aftermath of the financial crisis, while Republican lawmakers said they would direct their criticism at the banking regulators.
Gary Gensler, chairman of the Commodity Futures Trading Commission, said the J.P. Morgan losses highlight the need for the commodities regulator to have authority over U.S. institutions' overseas derivatives activities. "Failing to do so would mean American jobs and markets would likely move offshore, but, particularly in times of crisis, risk would come crashing back to our economy," Mr. Gensler said.